Early warning systems for currency crises: Amultivariate extreme value approach

• Main Authors: Phornchanok Cumperayot, Roy Kouwenberg
• Other Authors: Chulalongkorn University
• Format: Article
• Published: 2018
• Subjects: Economics, Econometrics and Finance
• Online Access: https://repository.li.mahidol.ac.th/handle/123456789/31699
• Institution: Mahidol University

We apply extreme value theory to assess the tail dependence between three currency crisis measures and 18 economic indicators commonly used for predicting crises. In our pooled sample of 46 countries in the period 1974-2008, we find that nearly all pairs of variables are asymptotically independent: in the limit, extreme values of economic indicators are not followed by severe currency crashes. Our findings may explain the poor performance of existing early warning systems for currency crises. However, we do find that economic variables with stronger extremal association with the exchange rate have better crisis prediction performance, both in-sample and out-of-sample. © 2013 Elsevier Ltd.