Forecasting Currency Crises: Which Methods Signaled The South African Crisis Of June 2006?

In this paper we test the ability of three of the most popular methods to forecast South African currency crises with a special emphasis on their out‐of‐sample performance. We choose the latest crisis of June 2006 to conduct an out‐of‐sample experiment. The results show that the signals approach was not able to forecast the out‐of‐sample crisis correctly; the probit approach was able to predict the crisis but only with models, that were based on raw data. The Markov‐regime‐switching approach predicts the out‐of‐sample crisis well. However, the results are not straightforward. In‐sample, the probit models performed remarkably well and were also able to detect, at least to some extent, out‐of‐sample currency crises before their occurrence. The recommendation is to not restrict the forecasting to only one approach.