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A random coefficient model of speculative attacks: The case of the Mexican peso

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  • Joseph Aschheim
  • Costas Christou
  • P. Swamy
  • George Tavlas

Abstract

A considerable body of theoretical and empirical literature has developed seeking to explain the timing, magnitude, and mechanics of speculative attacks against currencies. This paper extends the empirical specification of the traditional speculative attack model by developing a random coefficient (RC) model which, as we show, encompasses a variety of fixed-coefficient models as special cases. Two classes of models (fixed- and random-coefficient models) are estimated for the case of Mexican peso over the period January 1988 to Novemeber 1994, while forecasts of the peso/U.S. dollar exchange rate are generated for the period December 1994 through December 1995. The comparison of forecast errors generated by five model specifications indicates that forecasts based on the RC procedures are superior to those based on the fixed-coefficient estimation. It is also shown that there are good theoretical reasons why the RC procedure performs better in prediction than the fixed-coefficient procedure. Copyright Kluwer Academic Publishers 1996

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 7 (1996)
Issue (Month): 1 (March)
Pages: 553-571

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Handle: RePEc:kap:openec:v:7:y:1996:i:1:p:553-571

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Random Coefficient Models; Forecasting; Speculative Attacks; C22; C51; F31; F33;

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References

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  1. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  2. Canarellsal, Giorgio & Pollard, Stephen K. & Lai, Kon S., 1990. "Cointegration between exchange rates and relative prices: another view," European Economic Review, Elsevier, vol. 34(7), pages 1303-1322, November.
  3. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  4. P.A.V.B. Swamy & P.A. Tinsley, 1976. "Linear prediction and estimation methods for regression models with stationary stochastic coefficients," Special Studies Papers 78, Board of Governors of the Federal Reserve System (U.S.).
  5. Goldberg, Linda S., 1994. "Predicting exchange rate crises : Mexico revisited," Journal of International Economics, Elsevier, vol. 36(3-4), pages 413-430, May.
  6. P.A.V.B. Swamy & George S. Tavlas, 1993. "Random coefficient models: theory and applications," Finance and Economics Discussion Series 93-14, Board of Governors of the Federal Reserve System (U.S.).
  7. Edin, Per-Anders & Vredin, Anders, 1993. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Economic Journal, Royal Economic Society, vol. 103(416), pages 161-75, January.
  8. Blackburn, Keith & Sola, Martin, 1993. " Speculative Currency Attacks and Balance of Payments Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 7(2), pages 119-44, June.
  9. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
  10. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  11. P.A.V.B. Swamy & George S. Tavlas, 1990. "Is it possible to find an econometric law that works well in explanation and prediction? The case of Australian money demand," Finance and Economics Discussion Series 128, Board of Governors of the Federal Reserve System (U.S.).
  12. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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