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Central bank´s value at risk and financial crises: An application to the 2001 Argentine crisis

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Abstract

Blejer and Schumacher (1999) were the first to suggest that Central Bank’s Value at Risk (VaR), a widely used composite measure of potential portfolio losses in the corporate sector, could be used as an early warning indicator of financial crises. We extend their research in two aspects. First, we develop an operational model to calculate Central Bank’s VaR and illustrate the methodology using data from the recent financial crisis in Argentina. Second, we compare the predictive performance of diverse measures based on the VaR approach to that of another well known early warning system, the signals approach, and several univariate leading indicators. The results reveal a strong relationship between the measures proposed and the crisis. Furthermore, one of the measures provides higher accuracy and announces the probability of a crisis sooner than the competing indicators.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): IX (2006)
Issue (Month): (November)
Pages: 381-402

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Handle: RePEc:cem:jaecon:v:9:y:2006:n:2:p:381-402

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Keywords: currency crises; Argentina; value at risk;

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  1. Ho, Lan-Chih & Burridge, Peter & Cadle, John & Theobald, Michael, 2000. "Value-at-risk: Applying the extreme value approach to Asian markets in the recent financial turmoil," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 8(2), pages 249-275, May.
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  3. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series, The World Bank 1852, The World Bank.
  4. Pownall, Rachel A. J. & Koedijk, Kees G., 1999. "Capturing downside risk in financial markets: the case of the Asian Crisis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(6), pages 853-870, December.
  5. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
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  7. Giovannetti, G., 1990. "A Survey of Recente Empirical Tests of the Purchasing Power Parity Hypothesis," Papers, Roma "la Sapienza" - Scienze Economiche 1, Roma "la Sapienza" - Scienze Economiche.
  8. Alexandra Lai, 2002. "Modelling Financial Instability: A Survey of the Literature," Working Papers, Bank of Canada 02-12, Bank of Canada.
  9. Graciela Laura Kaminsky, 1999. "Currency and Banking Crises," IMF Working Papers, International Monetary Fund 99/178, International Monetary Fund.
  10. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
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Cited by:
  1. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.

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