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Regime switching as an alternative early warning system of currency crises - an application to South-East Asia

Author

Listed:
  • Arias, Guillaume

    (Centre d’Economie et de Finances Internationales (CEFI), Université de la Méditerranée Aix-Marseille II)

  • Erlandsson, Ulf

    (Department of Economics, Lund University)

Abstract
In this paper we develop an early warning system of currency crises based on the Markov switching methodology. Constructed data on speculative pressure from six Asian countries indicate that currency crises are mainly captured through volatility effects. Based on an extensive survey, we test potential determinants of exiting the tranquil state and find a number of variables with significant medians across the panel. Using these candidates, we obtain final specifications using a recently proposed penalized maximum likelihood methodology. The method enables us to extract smoother transition probabilities than in the standard case, reflecting the need of policy makers to have advance warning in the medium to long term ratherthan the short term. Our forecasting results indicate that the approach is useful in the early warning of currency crises setting.

Suggested Citation

  • Arias, Guillaume & Erlandsson, Ulf, 2004. "Regime switching as an alternative early warning system of currency crises - an application to South-East Asia," Working Papers 2004:11, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2004_011
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Andreou, Irène & Dufrénot, Gilles, 2009. "A Forewarning Indicator System for Financial Crises: the Case of Six Central and Eastern European Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 24, pages 87-115.
    2. Bolt, W. & Demertzis, D. & Diks, C.G.H. & Van der Leij, M.J., 2011. "Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices," CeNDEF Working Papers 11-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    3. Duprey, Thibaut & Klaus, Benjamin, 2017. "How to predict financial stress? An assessment of Markov switching models," Working Paper Series 2057, European Central Bank.
    4. Bolt, W. & Demertzis, D. & Diks, C.G.H. & Van der Leij, M.J., 2011. "Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices," CeNDEF Working Papers 11-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    5. D Bragoli & P Ganugi & G Ianulardo, 2009. "Gini’s Transvariation Analysis: An Application on Financial Crises in Developing Countries," Department of Economics Working Papers 16/09, University of Bath, Department of Economics.
    6. Katleho Makatjane & Ntebogang Moroke, 2021. "Predicting Extreme Daily Regime Shifts in Financial Time Series Exchange/Johannesburg Stock Exchange—All Share Index," IJFS, MDPI, vol. 9(2), pages 1-18, March.
    7. Kristina Kittelmann & Marcel Tirpak & Rainer Schweickert & Lúcio Vinhas De Souza, 2006. "From Transition Crises to Macroeconomic Stability? Lessons from a Crises Early Warning System for Eastern European and CIS Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 48(3), pages 410-434, September.
    8. Daniela Bragoli & Piero Ganugi & Giancarlo Ianulardo, 2013. "Gini’s transvariation analysis: an application on financial crises in developing countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(1), pages 153-174, February.

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    More about this item

    Keywords

    Currency crisis; Early Warning System; Markov Switching;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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