Predicting Emerging Market Currency Crashes
AbstractThis 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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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 02/7.
Date of creation: 01 Jan 2002
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