Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis
25 Pages Posted: 23 Aug 2005 Last revised: 18 May 2009
Date Written: March 1, 2009
In this paper we use principal components analysis to obtain vulnerability indicators able to predict financial turmoil. Probit modelling through principal components and also stochastic simulation of a Dynamic Factor model are used to produce the corresponding probability forecasts regarding the currency crisis events affecting a number of East Asian countries during the 1997-1998 period. The principal components model improves upon a number of competing models, in terms of out-of-sample forecasting performance.
Keywords: Financial contagion, dynamic factor model
JEL Classification: C32, C51, F34
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