EARLY WARNING SYSTEM AND CURRENCY VOLATILITY MANAGEMENT IN EMERGING MARKET
Keywords:
Dynamic Logit Model, Foreign Exchange, Early Warning System, Emerging Countries, Foreign Exchange Intervention.
Abstract
This paper adopts theoretical models from Candelon, Dumitrescu, and Hurlin and empirical model from Commerzbank to devise a set of indicators that can serve as an early warning system (EWS) on exchange rate. In light of the appreciation of emerging countries’ currencies during the Fed quantitative easing period, it is important to understand on how The Fed normalization would put pressure on managing volatility for central banks, especially for countries with large trade and fiscal deficit such as Indonesia. All in all, using both EWS models, central banks could discern potential exchange rate depreciation for intervention purpose.Downloads
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References
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Candelon, B., Dumitrecu, E.I., Hurlin, C. (2009). How to evaluate an Early Warning System? Towards a Unified Statistical Framework for Assessing Financial Crises Forecasting Methods. Working Paper.
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Gallant, A.R. (2008). Nonlinear Statistical Models. New York. USA: John Wiley and Sons.
Gracia, C.J., Restrepo, J.E., and Roger, S. (2011). How Much Should Inflation Targeters Care About the Exchange Rate?, Journal of International Money and Finance 30(7), 1590-1617.
Harding, D., and Pagan A. (2009). An Econometric Analysis of Some Models for Constructed Binary Time Series. NCER Working Paper 39.
Kaminsky, G., Lizondo, S., Reinhart, C. (1998). Leading Indicators of Currency Crises. IMF Staff papers, 45 (1), 1-48.
Kauppi, H., Saikkonen, P. (2008). Predicting U.S. Recession with Dynamic Binary Response Models. The Review of Economics and Statistics, 90 (4), 777-791.
Kumar, M., Moorthy, U., and Perraudin, W. (2003). Predicting Emerging Market Currency Crashes. Journal of Empirical Finance, 10, 427-454.
Neely, C.J. (2001). The Practice of Central Bank Intervention: Looking Under the Hood. Federal Reserve Bank of St. Louis Review May/June, 1-10.
Neely, C.J. (2001). Central Bank Authorities’ Believe about Foreign Exchange Intervention. Journal of International money and Finance, 27(1), 1-25.
Bank for International Settlements. (2005). Foreign Exchange Market Intervention in Emerging Markets: Motives, Techniques and Implication. BIS Papers 24.
Bank for International Settlements. (2013). Market Volatility and Foreign Exchange Intervention in EMEs: What has Changed?. BIS Papers 73.
Basu, K., and Varoudakis, A. (2013). How to Move the Exchange Rate if You Must: The Diverse Practice of Foreign Exchange Intervention by Central Banks and a Proposal for Doing it
Better. World Bank Policy Research Working Paper 6460.
Berg, A., and Pattillo, C. (1999). Predicting Currency Crises: The Indicators Approach and an Alternative. Journal of International Money and Finance, 18, 561-586.
Bussiere, M., and Fratzscher, M. (2006). Towards a New Early System of Financial Crises. Journal of International Money and Finance, 25(6), 953-973.
Candelon, B., Dumitrecu, E.I., Hurlin, C. (2009). How to evaluate an Early Warning System? Towards a Unified Statistical Framework for Assessing Financial Crises Forecasting Methods. Working Paper.
Candelon, B., Dumitrecu, E.I., Hurlin, C. (2010). Currency Crises Early Warning System: why they should be Dynamic. Working Paper.
Commerzbank. (2013). Emerging Market Currency Exposure: How to Hedge and Manage Exposures to High Yield, Volatile Currencies. Commerzbank.
Falcetti, E., Tudela, M. (2006). Modelling Currency Crises in Emerging Markets: A Dynamic Probit Model with Unobserved Heterogeneity and Autocorrelated Errors. Oxford Bulletin
of Economics and Statistics, 68(4), 445-471.
Frankel, J.A., Yetman, J. (1990). Chartists, Fundamentalist and Trading in The Foreign Exchange Market. American Economic Review, 80(2), 181-185.
Fuertes, A.M., Kalotychou, E. (2007). Optimal Design of Early Warning Systems for Sovereign Debt Crises. International Journal of Forecasting, 23(1), 85-100
Gallant, A.R. (2008). Nonlinear Statistical Models. New York. USA: John Wiley and Sons.
Gracia, C.J., Restrepo, J.E., and Roger, S. (2011). How Much Should Inflation Targeters Care About the Exchange Rate?, Journal of International Money and Finance 30(7), 1590-1617.
Harding, D., and Pagan A. (2009). An Econometric Analysis of Some Models for Constructed Binary Time Series. NCER Working Paper 39.
Kaminsky, G., Lizondo, S., Reinhart, C. (1998). Leading Indicators of Currency Crises. IMF Staff papers, 45 (1), 1-48.
Kauppi, H., Saikkonen, P. (2008). Predicting U.S. Recession with Dynamic Binary Response Models. The Review of Economics and Statistics, 90 (4), 777-791.
Kumar, M., Moorthy, U., and Perraudin, W. (2003). Predicting Emerging Market Currency Crashes. Journal of Empirical Finance, 10, 427-454.
Neely, C.J. (2001). The Practice of Central Bank Intervention: Looking Under the Hood. Federal Reserve Bank of St. Louis Review May/June, 1-10.
Neely, C.J. (2001). Central Bank Authorities’ Believe about Foreign Exchange Intervention. Journal of International money and Finance, 27(1), 1-25.
Published
2016-12-29
How to Cite
S, N., & Matondang, S. (2016). EARLY WARNING SYSTEM AND CURRENCY VOLATILITY MANAGEMENT IN EMERGING MARKET. Buletin Ekonomi Moneter Dan Perbankan, 19(2), 129-152. https://doi.org/10.21098/bemp.v19i2.627
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
