Currency Crises and the Stock Market: Empirical Evidence for Another Type of Twin Crisis
Stefan Eichler, Dominik Maltritz
Applied Economics,
Nr. 29,
2011
Abstract
We explore the dependency between currency crises and the stock market in emerging economies. Our focus is two-fold. First, the risk of a currency crisis rises as the foreign stake in the domestic stock market increases. Successful economies with high capital flows into their booming stock markets especially are prone to stock market-induced currency crises. Second, we apply the dividend growth model to show that stock markets crash in the run-up to a currency crisis. This new type of twin crisis is empirically tested by employing a logit framework using quarterly data for 33 emerging economies for 1994Q1–2007Q4.
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Currency Crisis Prediction Using ADR Market Data: An Options-based Approach
Stefan Eichler, Dominik Maltritz
International Journal of Forecasting,
Nr. 4,
2010
Abstract
During capital control episodes, large price deviations between American Depositary Receipts (ADR) and their underlying stocks signal that a currency crisis is about to occur. We interpret this price spread as the price of a call option. Using option pricing theory we derive detailed information about both the probability of a currency crisis and the expected magnitude of devaluation. Analyzing daily ADR market data preceding the Venezuelan crisis (1996), our approach predicts crisis probabilities of almost 100% and forecasts the exchange rate after floating quite accurately. During the Argentine crisis (2002), the estimated exchange rates are similar to the actual ones.
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Potential Effects of Basel II on the Transmission from Currency Crises to Banking Crises – The Case of South Korea
Tobias Knedlik, Johannes Ströbel
Journal of Money,
Nr. 13,
2010
Abstract
In this paper we evaluate potential effects of the Basel II accord on preventing the transmission from currency crises to banking crises by analyzing the South Korean crisis of 1997. We show that regulatory capital reserves under Basel II would have been lower than those under Basel I, and that therefore Basel II would have had adverse effects on the development of the crisis. Furthermore we investigate whether the behavior of rating agencies has changed since the East Asian crisis. We find no evidence that rating agencies have started to take micro-mismatches into account. Thus, we have reservations concerning the effectiveness of Basel II.
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The ADR Shadow Exchange Rate as an Early Warning Indicator for Currency Crises
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Journal of Banking and Finance,
Nr. 11,
2009
Abstract
We develop an indicator for currency crisis risk using price spreads between American Depositary Receipts (ADRs) and their underlyings. This risk measure represents the mean exchange rate ADR investors expect after a potential currency crisis or realignment. It makes crisis prediction possible on a daily basis as depreciation expectations are reflected in ADR market prices. Using daily data, we analyze the impact of several risk drivers related to standard currency crisis theories and find that ADR investors perceive higher currency crisis risk when export commodity prices fall, trading partners’ currencies depreciate, sovereign yield spreads increase, or interest rate spreads widen.
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Banking Integration, Bank Stability, and Regulation: Introduction to a Special Issue of the International Journal of Central Banking
Reint E. Gropp, H. Shin
International Journal of Central Banking,
Nr. 1,
2009
Abstract
The link between banking integration and financial stability has taken center stage in the wake of the current financial crisis. To what extent is the banking system in Europe integrated? What role has the introduction of the common currency played in this context? Are integrated banking markets more vulnerable to contagion and financial instability? Does the fragmented regulatory framework in Europe pose special problems in resolving bank failures? What policy reforms may become necessary? These questions are of considerable policy interest as evidenced by the extensive discussions surrounding the design and implementation of a new regulatory regime and by the increasing attention coming from academia.
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Forecasting Currency Crises: Which Methods signaled the South African Crisis of June 2006?
Tobias Knedlik, Rolf Scheufele
South African Journal of Economics,
2008
Abstract
In this paper we test the ability of three of the most popular methods to forecast South African currency crises with a special emphasis on their out-of-sample performance. We choose the latest crisis of June 2006 to conduct an out-of-sample experiment. The results show that the signals approach was not able to forecast the out-of-sample crisis correctly; the probit approach was able
to predict the crisis but only with models, that were based on raw data. The Markov-regime- switching approach predicts the out-of-sample crisis well. However, the results are not straightforward. In-sample, the probit models performed remarkably well and were also able to detect, at least to some extent, out-of-sample currency crises before their occurrence. The recommendation is to not restrict the forecasting to only one approach.
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Three methods of forecasting currency crises: Which made the run in signaling the South African currency crisis of June 2006?
Tobias Knedlik, Rolf Scheufele
IWH Discussion Papers,
Nr. 17,
2007
Abstract
In this paper we test the ability of three of the most popular methods to forecast the South African currency crisis of June 2006. In particular we are interested in the out-ofsample performance of these methods. Thus, we choose the latest crisis to conduct an out-of-sample experiment. In sum, the signals approach was not able to forecast the outof- sample crisis of correctly; the probit approach was able to predict the crisis but just with models, that were based on raw data. Employing a Markov-regime-switching approach also allows to predict the out-of-sample crisis. The answer to the question of which method made the run in forecasting the June 2006 currency crisis is: the Markovswitching approach, since it called most of the pre-crisis periods correctly. However, the “victory” is not straightforward. In-sample, the probit models perform remarkably well and it is also able to detect, at least to some extent, out-of-sample currency crises before their occurrence. It can, therefore, not be recommended to focus on one approach only when evaluating the risk for currency crises.
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Signaling Currency Crises in South Africa
Tobias Knedlik
IWH Discussion Papers,
Nr. 19,
2006
Abstract
Currency crises episodes of 1996, 1998, and 2001 are used to identify common country specific causes of currency crises in South Africa. The paper identifies crises by the use of an Exchange Market Pressure (EMP) index as introduced by Eichengreen, Rose and Wyplosz (1996). It extends the Signals Approach introduced by Kaminsky and Reinhart (1996, 1998) by developing a composite indicator in order to measure the evolution of currency crisis risk in South Africa. The analysis considers the standard suspects from international currency crises and country specifics as identified by the Myburgh Commission (2002) and current literature as potentially relevant indicators.
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Are the Central and Eastern European Transition Countries still vulnerable to an Financial Crisis? Results from the Signals Approach
Axel Brüggemann, Thomas Linne
IWH Discussion Papers,
Nr. 157,
2002
Abstract
The aim of the paper is to analyse the vulnerability of the Central and Eastern European accession countries to the EU as well as that of Turkey and Russia to a financial crisis. Our methodology is an extension of the signals approach. We develop a composite indicator to measure the evolution of the risk potential in each country. Our findings show that crises in Central and Eastern Europe are caused by much the usual suspects as in others emerging markets. In particular an overvalued exchange rate, weak exports and dwindling currency reserves have good predictive power for assessing crisis vulnerabilities.
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