Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259884 
Year of Publication: 
2004
Series/Report no.: 
Working Paper No. 2004:11
Publisher: 
Lund University, School of Economics and Management, Department of Economics, Lund
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.
Subjects: 
Currency crisis
Early Warning System
Markov Switching
JEL: 
C22
C53
F47
Document Type: 
Working Paper

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