Predicting Emerging Market Currency Crashes

W. Perraudin, Manmohan Kumar and Uma Moorthy

No 2002/007, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; trading strategy; foreign exchange; crisis definition; emerging market; Exchange rates; emerging market crises; trading strategies; unanticipated depreciation; depreciation model; crash definition; Depreciation; Currencies; International reserves; Real effective exchange rates; Foreign direct investment; Global (search for similar items in EconPapers)
Pages: 38
Date: 2002-01-01
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Citations: View citations in EconPapers (33)

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