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

June 18, 2012


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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