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Are emerging market currency crises predictable? A test

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  • Peltonen, Tuomas A.

Abstract

This paper analyzes the predictability of emerging market currency crises by comparing the often used probit model to a new method, namely a multi-layer perceptron artificial neural network (ANN) model. According to the results, both models were able to signal currency crises reasonably well in-sample, but the forecasting power of these models out-ofsample was found to be rather poor. Only in the case of Russian (1998) crisis were both models able to signal the crisis well in advance. The results reinforced the view that developing a stable model that can predict or even explain currency crises is a challenging task. JEL Classification: F31, E44, C25, C23, C45

Suggested Citation

  • Peltonen, Tuomas A., 2006. "Are emerging market currency crises predictable? A test," Working Paper Series 571, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2006571
    Note: 355041
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp571.pdf
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    More about this item

    Keywords

    artificial neural networks; currency crises; emerging markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics

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