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The Role of Bank and Corporate Balance Sheets on Early Warning Systems of Currency Crises—An Empirical Study

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  • Christian Mulder
  • Roberto Perrelli
  • Manuel Duarte Rocha

Abstract

This study analyzes the role of bank and corporate balance sheets on early warning systems (EWS) of currency crises. Using firm-level data on debt structure, leverage, liquidity, and profitability, this study presents estimations of EWS for a panel of emerging markets. Using calibration experiments, we assess the performance of alternative EWS specifications in a comprehensive range of crisis-probability cut-offs‏. These models supplement EWS based on traditional macroeconomic indicators, improving forecasting performance substantially. The results support the third-generation models of currency crises and can assist policymakers on the design of surveillance strategies tailored for heterogeneous levels of risk tolerance and country specificities.

Suggested Citation

  • Christian Mulder & Roberto Perrelli & Manuel Duarte Rocha, 2016. "The Role of Bank and Corporate Balance Sheets on Early Warning Systems of Currency Crises—An Empirical Study," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(7), pages 1542-1561, July.
    • Handle: RePEc:mes:emfitr:v:52:y:2016:i:7:p:1542-1561
    DOI: 10.1080/1540496X.2016.1158545
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