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Predicting emerging market currency crashes

  • Kumar, Mohan
  • Moorthy, Uma
  • Perraudin, William

This 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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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 10 (2003)
Issue (Month): 4 (September)
Pages: 427-454

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Handle: RePEc:eee:empfin:v:10:y:2003:i:4:p:427-454
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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  1. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
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