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Regime switching as an alternative early warning system of currency crises - an application to South-East Asia

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  • Arias, Guillaume

    ()
    (Centre d’Economie et de Finances Internationales (CEFI), Université de la Méditerranée Aix-Marseille II)

  • Erlandsson, Ulf

    (Department of Economics, Lund University)

Abstract

In this paper we develop an early warning system of currency crises based on the Markov switching methodology. Constructed data on speculative pressure from six Asian countries indicate that currency crises are mainly captured through volatility effects. Based on an extensive survey, we test potential determinants of exiting the tranquil state and find a number of variables with significant medians across the panel. Using these candidates, we obtain final specifications using a recently proposed penalized maximum likelihood methodology. The method enables us to extract smoother transition probabilities than in the standard case, reflecting the need of policy makers to have advance warning in the medium to long term ratherthan the short term. Our forecasting results indicate that the approach is useful in the early warning of currency crises setting.

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Bibliographic Info

Paper provided by Lund University, Department of Economics in its series Working Papers with number 2004:11.

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Length: 37 pages
Date of creation: 15 Mar 2004
Date of revision:
Handle: RePEc:hhs:lunewp:2004_011

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
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Keywords: Currency crisis; Early Warning System; Markov Switching;

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Cited by:
  1. Bolt, W. & Demertzis, D. & Diks, C.G.H. & Van der Leij, M.J., 2011. "Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices," CeNDEF Working Papers 11-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Kristina Kittelmann & Marcel Tirpak & Rainer Schweickert & Lúcio Vinhas de Souza, 2006. "From Transition Crises to Macroeconomic Stability? Lessons from a Crises Early Warning System for Eastern European and CIS Countries," Kiel Working Papers 1269, Kiel Institute for the World Economy.
  3. Bragoli, Daniela & Ganugi, Piero & Ianulardo, Giancarlo, 2009. "Gini’s Transvariation Analysis : An Application on Financial Crises in Developing Countries," Department of Economics Working Papers 15963, University of Bath, Department of Economics.
  4. Irène Andreou & Gilles Dufrénot & Alain Sand-Zantman & Aleksandra Zdzienicka-Durand, 2007. "A forewarning indicator system for financial crises: the case of six Central and Eastern European countries," Post-Print halshs-00142433, HAL.
  5. Daniela Bragoli & Piero Ganugi & Giancarlo Ianulardo, 2013. "Gini’s transvariation analysis: an application on financial crises in developing countries," Empirica, Springer, vol. 40(1), pages 153-174, February.

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