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Evaluating currency crisis:A multivariate Markov switching approach

Author

Listed:
  • Kostas Mouratidis

    (Department of Economics, The University of Sheffield)

  • Dimitris Kenourgios
  • Aris Samitas
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.

Suggested Citation

  • Kostas Mouratidis & Dimitris Kenourgios & Aris Samitas, 2010. "Evaluating currency crisis:A multivariate Markov switching approach," Working Papers 2010018, The University of Sheffield, Department of Economics, revised Oct 2010.
    • Handle: RePEc:shf:wpaper:2010018
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    File URL: http://www.shef.ac.uk/economics/research/serps/articles/2010_018.html
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    References listed on IDEAS

    as
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    Cited by:

    1. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1141-1153.

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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