A Cardan’s Discriminant Approach to Predicting Currency Crashes

A Cardan’s Discriminant Approach to Predicting Currency Crashes

This paper models large swings in exchange rates by introducing nonlinearity via the generalized normal (GEN) distribution [Lye, J.N., Martin, V.L., 1993. Robust estimation, nonnormalities and generalized exponential distributions. Journal of the American Statistical Association 88, 261-267]. As the...

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Bibliographic Details
Main Authors: KOH, Benedict Seng Kee, FONG, Wai Mun, CHAN, Fabrice
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2007
Subjects:
Cardan's discriminant
Currency crashes
Emerging markets
Generalized normal model
Multimodality
Finance and Financial Management
Portfolio and Security Analysis
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1094
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2093/viewcontent/Cardan_2007_av.pdf
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Institution: Singapore Management University
Language: English
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Summary:This paper models large swings in exchange rates by introducing nonlinearity via the generalized normal (GEN) distribution [Lye, J.N., Martin, V.L., 1993. Robust estimation, nonnormalities and generalized exponential distributions. Journal of the American Statistical Association 88, 261-267]. As the distribution allows for bimodality, a switch between modes may give rise to currency crashes. A statistic known as Cardan's discriminant, based on the shape parameters of the GEN, is used to detect bimodality. The Cardan's discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies.

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