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Currency Crises Early Warning Systems: why they should be Dynamic

Author

Listed:
  • Bertrand Candelon
  • Elena-Ivona DUMITRESCU
  • Christophe HURLIN

Abstract

Traditionally, financial crisis Early Warning Systems (EWSs) have relied on macroeconomic leading indicators when forecasting the occurrence of such events. This paper extends such discrete-choice EWSs by taking the persistence of the crisis phenomenon into account. The dynamic logit EWS is estimated using an exact maximum likelihood estimation method in both a country-by-country and a panel framework. The forecasting abilities of this model are then scrutinized using an evaluation methodology which was designed recently, specifically for EWSs. When used for predicting currency crises for 16 countries, this new EWS turns out to exhibit significantly better predictive abilities than the existing static one, both in- and out-of-sample, thus supporting the use of dynamic specifications for EWSs for financial crises.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bertrand Candelon & Elena-Ivona DUMITRESCU & Christophe HURLIN, 2010. "Currency Crises Early Warning Systems: why they should be Dynamic," LEO Working Papers / DR LEO 399, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    • Handle: RePEc:leo:wpaper:399
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    References listed on IDEAS

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    More about this item

    Keywords

    dynamic models; currency crisis; Early Warning System;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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