Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies

April 17, 2014

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Format: Chicago

Fabio Comelli. Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies, (USA: International Monetary Fund, 2014) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We compare how logit (fixed effects) and probit early warning systems (EWS) predict insample and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP growth rates and higher net foreign assets significantly reduce the probability of experiencing a currency crisis, while high levels of credit to the private sector increase it. We find that the logit and probit EWS out-of-sample performances are broadly similar, and that the EWS performance can be very sensitive both to the size of the estimation sample, and to the crisis definition employed. For macroeconomic policy purposes, we conclude that a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.

Subject: Currency crises, Early warning systems, Exchange rate indexes, Financial crises, Foreign exchange, Global financial crisis of 2008-2009

Keywords: Coefficient estimate, Crisis episode, Currency crises, Currency crisis, Early warning systems, Estimation sample, Exchange rate indexes, Global, Global financial crisis of 2008-2009, Index threshold, Out-of-sample performance, Pressure index, WP

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/065
Stock No:

WPIEA2014065
ISBN:

9781484355282
ISSN:

1018-5941

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