Alternative Exchange Market Pressure Index Model for Currency Crisis

Mouridi M. Hamidou, Dr. Joseph K. Mung'atu, Prof. George O. Orwa

Abstract


Currency crisis is classified as one of the top ranked extreme risks of the third millennium. It becomes a serious financial and economic problem worldwide and researchers have focused their attention on understanding how those crises are studied, modeled and analyzed. These currency crises exist in the form of speculative attacks in the foreign exchange market. These speculative pressures are measured by crisis indexes named exchange market pressure indexes (EMPI), which need to reflect both successful and unsuccessful speculative pressures on local currency. This paper aims to develop an alternative exchange market pressure index model for currency crisis. The methodology that will be adopted to construct the alternative EMP index model is the “EMPI model independent based approach”. A simulation analysis is also performed to validate and verify the theoretical properties of the proposed EMPI model. We end up by studying the different properties related to the EMPI model. This new alternative EMPI model is expected to measures incidence of currency crisis periods in a regional or/and global economies  (countries), to measure also incidence for currency crisis for successful and unsuccessful attacks  and identify currency crisis happening either in a fixed, floating and/or intermediate exchange regimes. Our investigation suggests that the exchange market pressure index similar to other financial time series tends to be heavy tailed. Overall, the results appear to confirm that the EMPI is stationary and again correlated. A comparison study on Dollar and Euro Kenya's EMPIs is conducted and results reveal a very weak difference between them.

This study covers only a small area of this growing field of research. It contributes by constructing an alternative EMPI model that may have a position in the toolbox of economists looking for more accurate model in predicting currency crises.


Keywords


Currency crisis; Periods of crisis; Exchange market pressure; Speculative attack; Model-independent.

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References


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