An optimal early warning system for currency crises under model uncertainty - Economic Research Forum (ERF)

An optimal early warning system for currency crises under model uncertainty

Mamdouh M. Abdelsalam and Hany Abdel-Latif


Date:
August, 2019

NO.
1334

Length:
28 pages

Publisher:
Economic Research Forum

Topic:
E4. Money and Interest Rates
F4. Macroeconomic Aspects of International Trade and Finance
F3. International Finance
G. Financial Economics

This paper assesses a number of early warning (EWS) models of financial crises with the aim of proposing an optimal model that can predict the incidence of a currency crisis in developing countries. For this purpose, we employ the dynamic model averaging (DMA) and equal weighting (EW) approaches to combine forecasts from individual models allowing for time varying weights. Taking Egypt as a case study and focusing only on currency crises, our findings show that combining forecasts (DMA- and EW-based EWS) models which account for model uncertainty perform better than other competing models in both in-sample and out-of-sample forecasts.

Authors

Mamdouh M. Abdelsalam

Lecturer in Economics, Faculty of Commerce, Minufia University


Research Associates

Hany Abdel-Latif

Lecturer in Economics, Swansea University UK


Project

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