TY - JOUR
TI - Probabilities, Probits and the Timing of Currency Crises
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KW - currency crisis
KW - early warning system
KW - probit model
KW - threshold model
AB - 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
AU - Collins, Susan M.
UR - http://ecsocman.hse.ru/text/19080520/
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