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Currency Crisis Early Warning Systems: Why They should be Dynamic

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  • Bertrand Candelon
  • Christophe Hurlin
  • Elena Dumitnescu

Abstract

Traditionally, nancial crisis Early Warning Systems (EWSs) rely on macroeconomic leading indicators to forecast the occurrence of such events. This paper extends such discrete-choice EWSs by taking into account the persistence of the crisis phenomenon. The dynamic logit EWS is estimated using an exact maximum likelihood estimation method both in a time series and panel form. This model's forecasting abilities are then scrutinized by using an evaluation methodology recently designed speci cally for EWSs. When applied for predict- ing currency crises for 16 countries, this new EWS turns out to exhibit signi cantly better predictive abilities than the existing static one, both in- and out-of -sample, thus supporting the use of dynamic speci cations for EWSs for nancial crises.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-161.

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Length: 41 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-161

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Keywords: dynamic models; currency crisis; Early Warning System.;

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References

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  1. Andrew Berg & Rebecca N. Coke, 2004. "Autocorrelation-Corrected Standard Errors in Panel Probits," IMF Working Papers 04/39, International Monetary Fund.
  2. Abdul Abiad, 2003. "Early Warning Systems," IMF Working Papers 03/32, International Monetary Fund.
  3. Jushan Bai & Serena Ng, 2001. "A New Look at Panel Testing of Stationarity and the PPP Hypothesis," Economics Working Paper Archive 467, The Johns Hopkins University,Department of Economics.
  4. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
  5. Bertrand Candelon & Elena-Ivona Dumitrescu & Christophe Hurlin, 2012. "How to evaluate an Early Warning System ?," Working Papers halshs-00450050, HAL.
  6. van den Berg, Jeroen & Candelon, Bertrand & Urbain, Jean-Pierre, 2008. "A cautious note on the use of panel models to predict financial crises," Economics Letters, Elsevier, vol. 101(1), pages 80-83, October.
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Cited by:
  1. Adrian Pagan, 2013. "Patterns and Their Uses," NCER Working Paper Series 96, National Centre for Econometric Research.
  2. Elena-Ivona Dumitrescu & Bertrand Candelon & Christophe Hurlin & Franz C. Palm, 2012. "Multivariate Dynamic Probit Models: An Application to Financial Crises Mutation," Working Papers halshs-00630036, HAL.

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