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Predicting Emerging Market Currency Crashes
Author:
Mr. W. R. M. Perraudin null

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,
Mr. Manmohan S. Kumar
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Ms. Uma Moorthy null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2002: Issue 007
Language:
English
Publication Date:
01 Jan 2002
DOI:
https://doi.org/10.5089/9781451842425.001
ISBN:
9781451842425
ISSN:
1018-5941
Pages:
38
Keywords:
WP; trading strategy; foreign exchange; crisis definition; emerging market; Exchange rates; emerging market crises; trading strategies; unanticipated depreciation; depreciation model; crash definition; Depreciation; Currencies; International reserves; Real effective exchange rates; Foreign direct investment; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper assesses the extent to which crashes in emerging market currencies are predictable using simple logit models based on lagged macroeconomic and financial data. To evaluate our model, we calculate trading strategies in which an investor goes long or short in the currency depending on whether crash probabilities are low or high. When we estimate the model on part of the data and then use the parameter estimates to generate predictions for the remainder of the sample, we find that substantial profits may be made. Furthermore, the model correctly forecasts major crashes even on an out-of-sample basis.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund