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Three methods of forecasting currency crises: Which made the run in signaling the South African currency crisis of June 2006?

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Tobias Knedlik
Rolf Scheufele

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Abstract

In this paper we test the ability of three of the most popular methods to forecast the South African currency crisis of June 2006. In particular we are interested in the out-ofsample performance of these methods. Thus, we choose the latest crisis to conduct an out-of-sample experiment. In sum, the signals approach was not able to forecast the outof- sample crisis of correctly; the probit approach was able to predict the crisis but just with models, that were based on raw data. Employing a Markov-regime-switching approach also allows to predict the out-of-sample crisis. The answer to the question of which method made the run in forecasting the June 2006 currency crisis is: the Markovswitching approach, since it called most of the pre-crisis periods correctly. However, the “victory” is not straightforward. In-sample, the probit models perform remarkably well and it is also able to detect, at least to some extent, out-of-sample currency crises before their occurrence. It can, therefore, not be recommended to focus on one approach only when evaluating the risk for currency crises.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 17-07.

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Date of creation: Dec 2007
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Handle: RePEc:iwh:dispap:17-07

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Related research
Keywords: Currency crises; forecast; predictability; signals approach; Probit approach; Markov regime switching approach; South Africa;

Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
F31 - International Economics - - International Finance - - - Foreign Exchange
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation

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