Predicting Currency Crisis---A Practical Application for Risk Managers

Mills, Christopher; Omarova, Eleonora
January 2004
Business Economics;Jan2004, Vol. 39 Issue 1, p36
Academic Journal
Since the Mexican and Asian currency crises, a body of research has been developed in an effort to build early warning systems to predict such crises. This paper presents a practical application of a currency risk model based on an extension of the signal extraction methodology pioneered by Kaminsky and Reinhart (KR). We describe the rationale for attempting to predict currency crises, outline the methodology behind our model, and discuss how the model can be used in practical applications, with a particular focus on balancing the risk of failing to signal a crisis against the risk of crying wolf when crises do not materialize.


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