Evaluating currency crisis:A multivariate Markov switching approach

Kostas Mouratidis (), Dimitris Kenourgios and Aris Samitas
Additional contact information
Kostas Mouratidis: Department of Economics, The University of Sheffield

No 2010018, Working Papers from The University of Sheffield, Department of Economics

Abstract: This paper provides an empirical framework to analyse the nature of currency crises by extending earlier work of Jeanne and Masson (2000) who suggest that a currency crisis model with multiple equilibria can be estimated using Markov regime switching (MRS) models. However, Jeanne and Masson (2000) assume that the transition probabilities across equilibria are constant and independent of fundamentals. Thus, currency crisis is driven by a sunspot unrelated to fundamentals. This paper further contributes to the literature by suggesting a multivariate MRS model to analyse the nature of currency crises. In the new set up, one can test for the impact of the unobserved dynamics of fundamentals on the probability of devaluation. Empirical evidence shows that expectations about fundamentals, which are reflected by their unobserved state variables, not only affect the probability of devaluation but also can be used to forecast a currency crisis one period ahead.

JEL-codes: C32 F31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2010-10, Revised 2010-10
New Economics Papers: this item is included in nep-for, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.shef.ac.uk/economics/research/serps/articles/2010_018.html First version, 2010 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2010018

Access Statistics for this paper

More papers in Working Papers from The University of Sheffield, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Mike Crabtree ().