The Role of Bank and Corporate Balance Sheets on Early Warning Systems of Currency Crises—An Empirical Study

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Mulder, Christian ; Perrelli, Roberto ; Duarte Rocha, Manuel (2016)
  • Publisher: Taylor and Francis
  • Subject: currency crises | external vulnerability | emerging markets | exchange rates | balance sheet effects

This study analyzes the role of bank and corporate balance sheets on early warning systems (EWS) of currency crises. Using firm-level data on debt structure, leverage, liquidity, and profitability, this study presents estimations of EWS for a panel of emerging markets. Using calibration experiments, we assess the performance of alternative EWS specifications in a comprehensive range of crisis-probability cut-offs‏. These models supplement EWS based on traditional macroeconomic indicators, improving forecasting performance substantially. The results support the third-generation models of currency crises and can assist policymakers on the design of surveillance strategies tailored for heterogeneous levels of risk tolerance and country specificities.
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