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Probabilities, Probits and the Timing of Currency Crises

Опубликовано на портале: 25-10-2007
A growing empirical literature studies determinants of the probability of a currency crisis, often searching for a combination of indicators to provide an early warning system. The existing work frequently relies on discrete choice specifications, such as probits, that do not incorporate the time dimension of the occurrence of currency crises and that are not derived from an underlying behavioral model. These ad hoc specifications are defined over a fixed horizon (such as 24 months) and provide no consistent way of estimating crisis probabilities over other horizons (such as 3, 12 or 36 months)

This paper shows how a probit can be interpreted in terms of restrictions on a simple threshold model of the timing of a currency crisis, that is based on a standard theoretical model of crises. Using data for 25 emerging markets, a simple version of the threshold specification is shown to fit better than either a probit specification, or the exponential waiting time distribution implied by a poisson model of crises. The hypothesis that the threshold and probit models fit equally well can be rejected in favor of the threshold model. In addition, the threshold specification can be used to generate estimates of the probability of a crisis occurring over any future time horizon as a function of current country indicators. This is illustrated using a fuller version of the threshold model that incorporates information about the timing of crises

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