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Autocorrelation-Corrected Standard Errors in Panel Probits: An Application to Currency Crisis Prediction

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Author Info
Rebecca N. Coke
Andrew Berg

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Abstract

Many estimates of early-warning-system (EWS) models of currency crisis have reported incorrect standard errors because of serial correlation in the context of panel probit regressions. This paper documents the magnitude of the problem, proposes and tests a solution, and applies it to previously published EWS estimates. We find that (1) the uncorrected probit estimates substantially underestimate the true standard errors, by up to a factor of four; (2) a heteroskedasicity- and autocorrelation-corrected (HAC) procedure produces accurate estimates; and (3) most variables from the original models remain significant, though substantially less so than had been previously thought.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/39.

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Length: 20 pages
Date of creation: 23 Mar 2004
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Handle: RePEc:imf:imfwpa:04/39

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Related research
Keywords: Crisis prevention ; Currencies ; Economic models ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Tuomas Komulainen & ) & Johanna Lukkarila, 2003. "What drives financial crises in emerging markets?," Macroeconomics 0304010, EconWPA. [Downloadable!]
  2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
    Other versions:
  4. Arturo Estrella & Anthony P. Rodrigues, 1998. "Consistent covariance matrix estimation in probit models with autocorrelated errors," Staff Reports 39, Federal Reserve Bank of New York. [Downloadable!]
  5. Marcel Fratzscher, 2002. "On currency crises and contagion," Working Paper Series 139, European Central Bank. [Downloadable!]
    Other versions:
  6. Eduardo Borensztein & Gian Maria Milesi-Ferretti & Catherine A. Pattillo & Andrew Berg, 2000. "Anticipating Balance of Payments Crises--The Role of Early Warning Systems," IMF Occasional Papers 186, International Monetary Fund.
  7. Steven B. Kamin & John W. Schindler & Shawna L. Samuel, 2001. "The contribution of domestic and external factors to emerging market devaluation crises: an early warning systems approach," International Finance Discussion Papers 711, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany. [Downloadable!]
  9. Komulainen, Tuomas & Lukkarila, Johanna, 2003. "What drives financial crises in emerging markets?," BOFIT Discussion Papers 5/2003, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  10. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany. [Downloadable!]
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  11. Carmen M. Reinhart, 2002. "Default, Currency Crises, and Sovereign Credit Ratings," World Bank Economic Review, Oxford University Press, vol. 16(2), pages 151-170, August.
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  12. Burkart, O. & Coudert, V., 2000. "Leading Indicators of Currency Crises in Emerging Economies," Documents de Travail 74, Banque de France. [Downloadable!]
  13. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund. [Downloadable!]
  14. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  15. Amadou N. R. Sy, 2003. "Rating the Rating Agencies: Anticipating Currency Crises or Debt Crises," IMF Working Papers 03/122, International Monetary Fund. [Downloadable!]
    Other versions:
  16. Gourieroux Christian & Monfort Alain & Trognon A, 1982. "Estimation and test in probit models with serial correlation," CEPREMAP Working Papers (Couverture Orange) 8220, CEPREMAP.
  17. Komulainen, Tuomas & Lukkarila, Johanna, 2003. "What drives financial crises in emerging markets?," Emerging Markets Review, Elsevier, vol. 4(3), pages 248-272, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dieter Gerdesmeier & Barbara Roffia & Hans-Eggert Reimers, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank. [Downloadable!]
  2. González, M. & Minguez, R., 2005. "The Method Of Simulated Maximum Likelihood For The Estimaton Of Dynamic Ordered Probit: An Application To Country-Risk For Non-Developed Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(3), pages 99-133. [Downloadable!]
  3. Bettina Becker & Stephan G Hall, 2005. "Non-Linear Properties of Currency Crises in Emerging Markets," Money Macro and Finance (MMF) Research Group Conference 2005 13, Money Macro and Finance Research Group. [Downloadable!]
  4. Gonzalez, M. & Minguez, R., 2005. "A Study of Country-Risk for Non-Developed Countries in 1980-2000," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(1). [Downloadable!]
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