Predicting Currency Fluctuations and Crises: Do Resident Firms Have an Informational Advantage?

33 Pages Posted: 15 Nov 1999

See all articles by Daniel Kaufmann

Daniel Kaufmann

Natural Resource Governance Institute (NRGI); The Brookings Institution

Gil Mehrez

International Monetary Fund (IMF)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

Markets have had limited success predicting crises and might do better by drawing on private information available to resident enterprise managers, who seem to know better than markets about future movements in exchange rates.

Kaufmann, Mehrez, and Schmukler investigate whether resident enterprise managers have an informational advantage about the countries in which they work. They propose a method for extracting information available to resident managers but unknown to investors and forecasters.

They test their hypothesis of informational advantage using a unique data set, the Global Competitiveness Survey. The survey asks local managers about their outlook for the country in which they reside.

They find that local managers do have useful private information. Local managers` responses improve on conventional forecasts of future volatility and changes in the exchange rate, which are based on economic fundamentals or interest rate differentials.

They find that the local business community perceived in advance the recent crises in the Republic of Korea, Russia, and Thailand, but not those in Indonesia and Malaysia.

Markets have had limited success predicting crises and might do better by drawing on private information available to resident enterprise managers, who seem to know better than markets about future movements in exchange rates.

This paper - a product of Governance, Regulation, and Finance, World Bank Institute - is part of a larger effort in the institute to understand the roles of transparency and governance. The authors may be contacted at dkaufmann@worldbank.org, mehrezg@gunet.georgetown.edu, or sschmukler@worldbank.org.

JEL Classification: F3, F4, G1

Suggested Citation

Kaufmann, Daniel and Mehrez, Gil and Schmukler, Sergio, Predicting Currency Fluctuations and Crises: Do Resident Firms Have an Informational Advantage? (April 2003). World Bank Policy Research Paper No. 2259. Available at SSRN: https://ssrn.com/abstract=176730

Daniel Kaufmann

Natural Resource Governance Institute (NRGI) ( email )

80 Broad Street
New York, NY 10004
United States

HOME PAGE: http://www.resourcegovernance.org

The Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/kaufmannd

Gil Mehrez

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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