The Role of Bank and Corporate Balance Sheets on Early Warning Systems of Currency Crises—An Empirical Study

Christian Mulder (), Roberto Perrelli and Manuel Duarte Rocha

Emerging Markets Finance and Trade, 2016, vol. 52, issue 7, 1542-1561

Abstract: This study analyzes the role of bank and corporate balance sheets on early warning systems (EWS) of currency crises. Using firm-level data on debt structure, leverage, liquidity, and profitability, this study presents estimations of EWS for a panel of emerging markets. Using calibration experiments, we assess the performance of alternative EWS specifications in a comprehensive range of crisis-probability cut-offs‏. These models supplement EWS based on traditional macroeconomic indicators, improving forecasting performance substantially. The results support the third-generation models of currency crises and can assist policymakers on the design of surveillance strategies tailored for heterogeneous levels of risk tolerance and country specificities.

Date: 2016
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DOI: 10.1080/1540496X.2016.1158545

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