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Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies
Author:
Mr. Fabio Comelli
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Series:
IMF Working Papers
Volume/Issue:
Volume 2014: Issue 065
Language:
English
Publication Date:
17 Apr 2014
DOI:
https://doi.org/10.5089/9781484355282.001
ISBN:
9781484355282
ISSN:
1018-5941
Pages:
26
Keywords:
WP; currency crisis; Early warning systems; currency crises; out-of-sample performance; crisis episode; pressure index; estimation sample; Index threshold; coefficient estimate; Exchange rate indexes; Global financial crisis of 2008-2009; 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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We compare how logit (fixed effects) and probit early warning systems (EWS) predict insample and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP growth rates and higher net foreign assets significantly reduce the probability of experiencing a currency crisis, while high levels of credit to the private sector increase it. We find that the logit and probit EWS out-of-sample performances are broadly similar, and that the EWS performance can be very sensitive both to the size of the estimation sample, and to the crisis definition employed. For macroeconomic policy purposes, we conclude that a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund