Crisis Forecasting: Currency Overvaluation; Capital Mobility; Currency Appreciation; Credit

June 18, 2012

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Frankel and Saravelos (2010) identify reserves and currency overvaluation as the two most important predictors in currency crisis prediction

Cumperayot and Kouwenberg (2010) show the probability of a currency crisis within 12 months is 30% when domestic real interest rates are positive and extreme. ~ SSRN

Significant real currency appreciation has often preceded financial crises. ~ Gourinchas and Obstfeld (2009) ~ NBER

Rose and Spiegel (2010), Among the variables that forecast crises are:

  • credit market regulation (more regulation lessens crisis intensity)
  • current account surplus (a bigger surplus lessens crisis intensity)
  • short-term foreign debt (more debt raises crisis intensity)
  • real estate appreciation (more appreciation raises crisis intensity)
  • growth (but not level of) bank credit (higher growth raises crisis intensity).

The Leverage Cycle and Crashes By John Geanakoplos ~ Yale

Nassim Taleb on How to Detect Who Will Go Bust ~ Farnham Street

  • Look for potential losses that accelerate if one variable deviates

Correlation between Capital Mobility and Financial Crises (Rogoff and Reinhart) ~ twitter


Growth suffers amid high debt levels – Washington Post  


Changes in dealer repos forecast changes in financial market risk as measured by the CBOE’s Volatility Index $VIX.’ “Liquidity and Leverage” (Adrian and Shin, 2009)

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