Evaluating Currency Crises: A Multivariate Markov Regime Switching Approach

The Manchester School, Forthcoming

Posted: 21 Oct 2010 Last revised: 9 Feb 2011

See all articles by Kostas Mouratidis

Kostas Mouratidis

The Sheffield University - Department of Economics

Dimitris Kenourgios

National and Kapodistrian University of Athens - Department of Economics

Aristeidis Samitas

University of the Aegean

Dimitrios Vougas

Swansea University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 19, 2010

Abstract

This paper provides the empirical framework to analyse the nature of currency crises by extending earlier work of Jeanne and Masson (2000) who suggest that a currency crisis model with multiple equilibria can be estimated using Markov regime switching (MRS) models. However, Jeanne and Masson (2000) assume that the transition probabilities across equilibria are constant and independent of fundamentals. Thus, currency crisis is driven by a sunspot unrelated to fundamentals. This paper further contributes to the literature by suggesting a multivariate MRS model, first introduced by Phillips (1991), to be used to analyse the nature of currency crises. In the new set up, one can test for the impact of the unobserved dynamics of fundamentals on the probability of devaluation. Empirical evidence shows that expectations about fundamentals, which are reflected by their unobserved state variables, not only affect the probability of devaluation but can also be used to forecast a currency crisis one period ahead.

Keywords: Currency crises, Sunspots, Multivariate Markov Switching, Evaluating forecasts

JEL Classification: F31, C32

Suggested Citation

Mouratidis, Kostas and Kenourgios, Dimitris and Samitas, Aristeidis and Vougas, Dimitrios, Evaluating Currency Crises: A Multivariate Markov Regime Switching Approach (October 19, 2010). The Manchester School, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1694441

Kostas Mouratidis

The Sheffield University - Department of Economics ( email )

Sheffield, S1 4DT
Great Britain

Dimitris Kenourgios (Contact Author)

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Office 521
Athens, 10559
Greece
+30 210 3689449 (Phone)

Aristeidis Samitas

University of the Aegean ( email )

8 Michalon str.
Chios
Greece

Dimitrios Vougas

Swansea University - Department of Economics ( email )

Swansea SA2 8PP
United Kingdom

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