an integrated ews for predicting currency vulnerabilities in cee countries emanuel florin irimin

An integrated EWS for predicting currency

vulnerabilities in CEE countries

Emanuel Florin Irimin

RON/EUR evolution

Objective

• to construct a flexible short term warning system capable of identifying vulnerabilities that may trigger exchange market pressure on local currencies

• to analyze the events of the past months from the perspective of the major pressure Eastern Europe’s currencies were confronted with

Currency crises literature

Currency Crisis Literature

Models of Currency Crisis

Contagion Effects

Early Warning Systems

Formula EMP:

Currency crises definition

rr

ee

EMPti

ti

rti

ti

eti

1,

,

1,

,

,

11

otherwise

EMPifCrisis EMP

,0

2.,1

Exchange rate regimes

Crisis

The models

KLR

LOGIT

ANN

Data used

Data used

Indicators` effectiveness matrix

Crisis

(within 3 months)

No crisis

(within 3 months)

Signal was issued

A B

No signal was issued

C D

KLR Results – in sample

KLR Results – out of sample

Logit results

SIMPLE CRISIS

/CUMULATIVE

CRISIS

TRESHOLD/

PERCENTILE

RAW DATAINPUT

/BYNARY

INPUT

Out-of sample results for raw data

Out-of sample results for binary data

The Logit model

ANN architecture

Hidden layers

Output

ANN architecture

ANN out of sample performance

Comparative performance

Crisis within a three months period

Crisis within a month

The complex EWS