Variable Selection with Partial Least Squares Sensitivity Analysis: An Application to Currency Crises' Real Effects

47 Pages Posted: 19 Jun 2006

See all articles by Fabio A. Arciniegas

Fabio A. Arciniegas

Central American Bank of Economic Integration

Mark Embrechts

Rensselaer Polytechnic Institute (RPI)

Ismael E. Arciniegas Rueda

Constellation New Energy

Date Written: June 2006

Abstract

The effects of a currency crisis on the economy depend on non-linear relations among several variables that characterize the economic, financial, legal, and socio-political structure of the country at the onset of the crisis. We seek to determine which variables are significant in explaining currency crises' real effects when they are all considered together. It uses a novel algorithm with Partial Least Squares (PLS) for selecting relevant variables. This algorithm works well with datasets characterized by few observations relative to the number of right-hand side variables and nonlinearity. Variables describing the banking sector, the international trade, the severity of the crisis, and foreign interest rates are found to be significant. On the other hand, socio-political variables, IMF's intervention, and legal variables are found to be less significant. The results of the PLS sensitivity analysis are compared with all-best subsets variable selection and their predictive power are examined using neural networks.

Keywords: currency crises; partial least squares; and variable selection.

JEL Classification: C4,F3,F41

Suggested Citation

Arciniegas, Fabio A. and Embrechts, Mark and Arciniegas Rueda, Ismael E., Variable Selection with Partial Least Squares Sensitivity Analysis: An Application to Currency Crises' Real Effects (June 2006). Available at SSRN: https://ssrn.com/abstract=909508 or http://dx.doi.org/10.2139/ssrn.909508

Fabio A. Arciniegas

Central American Bank of Economic Integration ( email )

Edificio Sede, Bulevar Suyapa
Apartado Postal 772
Tegucigalpa
Honduras

Mark Embrechts

Rensselaer Polytechnic Institute (RPI) ( email )

12180

Ismael E. Arciniegas Rueda (Contact Author)

Constellation New Energy ( email )

111 Market Place
Baltimore, MD

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