EARLY WARNING SYSTEMS OF FINANCIAL CRISES - IMPLEMENTATION OF ACURRENCY CRISIS MODEL FOR UGANDA

The objective of this paper is to implement a prototype of a currency crisis modelas part of an early warning system framework for Uganda. The financial systemsof developing countries like Uganda are especially vulnerable and therefore robustinstruments to predict crises are needed. Our model is based on the signals approachdeveloped by Kaminsky, Lizondo and Reinhart (1998) and Kaminsky andReinhart (1999). The basic idea of the signals approach is to monitor several indicatorsthat tend to exhibit an „unusual” behaviour in the periods preceding a crisis.When an indicator crosses a threshold, then it is said to issue a „signal“ that a currencycrisis may occur within a given period. We implemented this signals approachfor Uganda. One of the main challenges in this connection is that Ugandaduring the analyzed periods had no currency crisis. Therefore, we modified themodel in a way that it estimates some of the performance measures based on empiricalstudies to obtain usable results. The outcomes of our calculations performedwell and were economically validated.

MoreLess

Year of publication:	2004-12-01
Authors:	Heun, Michael ; Schlink, Torsten
Institutions:	Frankfurt School of Finance & Management
Subject:	Frühwarnsystem \| Finanzkrise \| Banking Crisis \| Währungskrise

1 Introduction
2 Background Information
2.1 Country
2.2 Financial Sector
3 Literature Review
4 Step 1: The Index of Exchange Market Pressure
4.1 Methodology
4.2 Exchange Rates
4.3 Implementation
5 Step 2: The Indicators
5.1 Choice of Indicators
5.2 Calculating the Indicators
5.3 The Signal-extraction Method
5.4 Performance of Indicators – Methodology
5.5 Performance of Indicators – Implementation
5.6 Practical Issues
6 Step 3: The Composite Index and Probabilities of a Currency Crisis
6.1 Composite Index - Methodology
6.2 Composite Index - Implementation
6.3 Probabilities of a Currency Crisis - Methodology
6.4 Probabilities of a Currency Crisis - Implementation
7 Conclusions and possible Extensions
Appendix A. The Indicators
Appendix B. Data Definitions

Persistent link: https://ebvufind01.dmz1.zbw.eu/10005865806