Visual predictions of currency crises using self‐organizing maps

Throughout the 1990s, four global waves of financial turmoil occurred. The beginning of the 21st century has also suffered from several crisis episodes, including the global financial crisis of 2008–2009. However, to date, the forecasting results are still disappointing. This paper examines whether new insights can be gained from the application of the self‐organizing map (SOM) – a non‐parametric neural‐network‐based visualization tool. We develop a SOM‐based model for prediction of currency crises. We evaluate the predictive power of the model and compare it with that of a classical probit model. The results indicate that the SOM‐based model is a feasible tool for predicting currency crises. Moreover, its visual capabilities facilitate the understanding of the factors and conditions that contribute to the emergence of currency crises. Copyright © 2011 John Wiley & Sons, Ltd.     

Comparing COVID-19 with the GFC: A shockwave analysis of currency markets

I analyze the shockwave effect of the COVID-19 pandemic on currency markets, with a comparison to the global financial crisis (GFC), employing Kapetanios m-break unit root test, investigations of standalone risk measures—downside variance, upside risk, volatility skewness, Gaussian Value at Risk (VaR), historical VaR, modified VaR—and Diebold–Yilmaz volatility spillover analysis. Standalone risk analysis shows that the turmoil in the initial months of COVID-19 was not as severe as that in the GFC. However, examination of co-movements and volatility spillovers illustrates a different scenario. According to the results of the static connectedness measure of Diebold–Yilmaz, the shockwave of the COVID-19 pandemic in the total volatility spillover is about eight times greater than that of the GFC. Among standalone risk measures, the results closest to this finding are obtained from volatility skewness analysis. Additionally, of six foreign exchange rates, the Brazilian real and Turkish lira are the currencies experiencing the greatest increase in received volatility during the GFC and the COVID-19 pandemic, respectively. These findings suggest the severe effect of crises on emerging financial markets.     

Exchange traded currency derivatives markets in India: the road ahead

Indian exchanges have recently been permitted to offer currency futures on their platforms to the market participants. The paper outlines the contract, and charts the development and growth of currency futures in India since their inception in 2008. It emphasizes the existing close connectivity between commodity and currency markets. It highlights the increased exchange rate volatility of Indian exchange rate against US dollar (INRUSD) during conventional and non conventional trading hours and argues for the ability of the market to quickly adapt to extended trading hours. The paper recommends some new products and an alternative mechanism to settle the contracts.     

Empirics of currency crises: A duration analysis approach

This paper empirically analyzes the origins of currency crises for a group of OECD economies from 1970 through 1998. We apply duration analysis to examine how the probability of a currency crisis depends on the length of non‐crisis periods, contagion channels, and macroeconomic fundamentals. Our findings confirm the negative duration dependence of a currency crisis—the likelihood of speculative attack sharply increases at the beginning of non‐crisis periods and then declines over time until it abruptly rises again. The results also indicate the hazard of a crisis increase with high values of the volatility of unemployment rates, inflation rates, contagion factors—which mostly work through trade channels, unemployment rates, real effective exchange rate, trade openness, and size of economy. To address concerns regarding validity of the identified crisis episodes, we exploit crisis episodes that are identified by a more objective approach based on the extreme value theory. Our results are robust under various specifications including two different crisis event sets that are identified on monthly and quarterly basis.     

The implementation of an adjusted relative strength index model in foreign currency and energy markets of emerging and developed economies

This study proposes refinements to some weaknesses in the Relative Strength Index (RSI) model and tests its predictability over pre and post crisis periods for the most active USD based currency pairs, including two energy markets. A new model (AdRSI) is tested using daily data over 2001–2015. Benchmarked against RSI and buy-and-hold models, findings support an inverse relationship between energy and currency markets. While energy markets had relatively higher risk, Chinese yuan had the lowest annualized risk. AdRSI produced higher annualized returns, lower number of trades and higher annualized risk. Overall, the buy-and-hold model was superior with higher reward-to-volatility.     

The Twin Crises: Determinants of Banking and Currency Crises in the Turkish Economy

Several twin crises occurred in the Turkish economy in the last three decades. In this article, we aim to analyze the link between banking and currency crises and to illustrate the essential determinants of these twin crises by developing a multivariate logit model for the period 1990–2013. The empirical findings show that Turkish currency crises are mainly due to excessive fiscal deficits, rises in short-term external debt, overvaluation of Turkish lira, and external adverse shocks; banking crises are primarily caused by excessive money supplies and bank short positions. The empirical findings also indicate that banking crises lead to currency crises, and vice versa.     

Not all emerging markets are the same: A classification approach with correlation based networks

Using dynamic conditional correlations and network theory, this study brings a novel interdisciplinary framework to define the integration and segmentation of emerging countries. The individual EMBI+ spreads of 13 emerging countries from January 2003 to December 2013 are used to compare their interaction structure before (phase 1) and after (phase 2) the global financial crisis. Accordingly, the unweighted average of dynamic conditional correlations between cross country bond returns significantly increases in phase 2. At first glance, the increased co-movement degree suggests an integration of the sample countries after the crisis. However, using correlation based stable networks, we show that this is not enough to make such a strong conclusion. In particular, we reveal that the increased average correlation is more likely to be caused by clusters of countries that exhibit high within-cluster co-movement but not between-cluster co-movement. Potential reasons for the post-crisis segmentation and important implications for international investors and policymakers are discussed.     

Foreign currency borrowing by small firms in emerging markets: When domestic banks intermediate dollars

This paper investigates what induces small firms in an emerging market economy to borrow dollar credit from domestic banks. Our data are from a unique survey of firms in Lebanon. The findings complement studies of large firms with foreign currency loans from foreign lenders. Exporters, naturally hedged against currency risk, are more likely to incur dollar debt. Firms also partly hedge themselves by passing currency risk to customers and suppliers. Less opaque firms with easily verifiable collateral and higher net worth are more likely to access dollar credit. Firms reliant on formal financing (banks and supplier credit) are more likely to contract dollar debt than firms reliant on informal financing (family, friends and moneylenders). Bank relationships, however, do not increase the dollar debt likelihood. And finally, profitable firms are less likely to have dollar debt. Information frictions and limited collateral, therefore, constrain dollar credit even when it is intermediated domestically.     

Interdependence and dynamics in currency futures markets: A multivariate analysis of intraday data

This paper investigates long-term interdependencies and short-term dynamics in currency futures utilizing intraday data for six major foreign currencies: the British Pound, Deutsche Mark, Swiss Franc, Australian Dollar, Canadian Dollar, and Japanese Yen. Lack of cointegration (CI) among the foreign exchange futures is found to be the prevailing mode of behavior, but some temporary deviations from the no-CI condition are detected. There is a notable overlap between detected CI relationships and the timing of policy changes, world events, and regime shifts, indicating that the observed CIs are event-driven. The robustness of the CI results is checked with respect to variations in the model, lag structure, data period, sample horizon, and currency basket grouping. Impulse–response functions (IRFs) reveal that currency markets are in general efficient and absorb new information within the day. The interdependence among currencies is found to be asymmetric.     

Equity market integration in Central European emerging markets: A cointegration analysis with shifting regimes

We investigate the existence of long-run relations between emerging Central European stock markets and the mature stock markets of Europe and the United States. Allowing for instability in these long-run relations, we obtain evidence of links between the Central European markets that is stronger than has previously been reported. We also show that the Central European markets display equilibrium relations with their mature counterparts, which persist after controlling for structural changes. It follows that Central European markets have become more integrated with global markets.     

Measuring the convergence of national accounting standards with international financial reporting standards: The application of fuzzy clustering analysis

A single set of accounting standards is considered the path to achieving accounting convergence globally. Given the important role that formal harmonization/convergence plays in the accounting profession and global capital markets, this study focuses on the methods and methodology for the measurement of formal accounting convergence. Based on our review and evaluation of the existing methods for measuring the level of harmonization/convergence between any two sets of accounting standards, we propose using a new method of matching and fuzzy clustering analysis to assess the convergence progress of national accounting standards (NAS) with International Financial Reporting Standards (IFRS) from whole and single standards, respectively. Single standards are clustered according to their convergence level, which may indicate further convergence emphasis. As an illustrative example, the achievements made in China are evaluated using this new method. The results reveal that this new method can measure the convergence level of NAS with IFRS more clearly and informatively.     

Cointegration and causality in the Asian and emerging foreign exchange markets: Evidence from the 1990s financial crises

This article examines the cointegration level, changes in the existence and directions of causality of the foreign exchange (FX) rates in the Asian and emerging markets during the 1990s financial crises. Engle and Granger's simple bivariate and Johansen's multivariate cointegrations are applied to the FX rates for the 1994 Mexican, 1997 Asian, 1998 Russian, and 1999 Brazilian crises. In addition, the article conducts the Granger causality test and impulse response analysis to examine the causality pattern in all the FX rates. The analysis shows most of the pre-Mexican causality disappears and significant numbers of new causality emerge in the 1994 Mexican crisis while the 1997 Asian crisis generates significant spillover effects into the later part of the 1998 Russian and 1999 Brazilian crises.     

A rule-based fuzzy reasoning system for assessing the risk of management fraud

Detecting management fraud and assessing the risk of management fraud are significant issues confronting the auditing profession. Considerable theoretical and empirical research (Loebbecke, Eining, and Willingham, 1989; Bell, Szykowny, and Willingham, 1993; Fanning, Cogger, and Srivastava, 1995; and Hansen, McDonald, Messier, and Bell, 1996) has been accomplished investigating these issues. Building on this research, we demonstrate the construction of a rule-based fuzzy reasoning system to assess the risk of management fraud. The paper illustrates how fuzzy sets can be used intuitively to measure red flags on a categorical or interval scale, how different red flags can be combined using fuzzy rules, and how a single measure of the risk of management fraud can be derived. The knowledge base for this fuzzy reasoning system is developed by using the causal model of management fraud developed by Loebbecke, Eining and Willingham (1989), the empirical investigation of this model by Bell, Szykowny, and Willingham (1993), other researchers’ efforts and the authors’ judgments, using XpertRule software. The fuzzy reasoning system is tested using the fraud data provided by KPMG Peat Marwick. We discuss methods to magnify the knowledge base of this fuzzy reasoning system to make it a viable auditing tool, the costs and benefits of building a fuzzy reasoning system, and further extensions of this research. Copyright © 1998 John Wiley & Sons, Ltd.     

Financial markets in the laboratory: an experimental analysis of some stylized facts

This paper provides experimental evidence explaining a number of stylized facts associated with the behaviour of financial returns, in particular the fat tailed nature of their distribution and the persistence in their volatility. By means of a laboratory experiment, we investigate the effect of the quantity and quality of information present in a financial market upon its stylized facts, showing how both the quality and quantity of information might have an impact on volatility clustering and the emergence of fat tail returns.     

Purchasing power parity in ASEAN-5 countries: revisit with cross-sectional dependence and structural breaks

This paper re-examines the purchasing power parity (PPP) hypothesis for a panel of ASEAN-5 countries. The panel unit root and cointegration tests, which incorporate cross-sectional dependence and multiple structural breaks, are innovatively used for testing the PPP hypothesis. We could not find evidence that supports the existence of a long-run equilibrium between the relative price ratio and the nominal exchange rate for the whole period. Nevertheless, there is evidence of a cointegrating relationship for the post-crisis period. Our finding implies that a flexible exchange rate regime is suitable for the individual ASEAN countries.     

On the volatility spillover between lslamic and conventional stock markets: A quantile regression analysis

This paper aims at analyzing the degree and structure of interdependencies in terms of volatility (transmission, contagion) between Islamic and conventional stock markets on calm periods and at times of financial fragility and crisis. We focused on the recent financial instability periods and used the Quantile Regression-based GARCH model. Main results lead to very interesting conclusions. First, it has been found that Islamic stock markets are not totally immune to the global financial crisis. Second, a very strong interdependence is sensed from the conventional to the Islamic stock markets, especially, from the conventional developed markets to the Islamic Emerging and Arab markets and to the Islamic developed markets. Finally, it has been proved that the interdependencies from conventional to Islamic markets are propagated between Islamic markets. Our findings suggest that the Islamic finance industry does not seem able to provide cushion against economic and financial shocks that affect conventional markets.     

Convertibility risk: the precautionary demand for foreign currency in a crisis

This paper presents theoretical work linking money demand to the perceptions of households about the risk that domestic currency may become inconvertible or that it may be devalued. An empirical investigation of the size of this effect is carried out using monthly data for Korea to estimate an augmented demand-for-money equation. It is found that the fear of inconvertibility arising from the 1997 Korean currency crisis may have caused broad money demand to fall by 4–5% points,equivalent to the loss of reserves of $6–7.5 billion (or about 30% of reserves as measured at end-November 1997). This is a revised version of IMF Working paper WP/2001/210; it was written while Professor Black was Senior Policy Advisor at the IMF Institute and Christofides and Mourmouras were staff members in the IMF’s Policy Development and Review Department. The views expressed are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. For useful comments and suggestions we thank an anonymous referee, Tim Lane, Ydahlia Metzgen, Roberto Perelli, Tony Richards, Christian Mulder, Steve Russell, as well as seminar participants at the IMF Institute, the IMF’s Asia and Pacific Department, Federal Reserve Board, and Bank of Indonesia. We would also like to note similar (unpublished) empirical results using our approach by Dr. Rino Effendi for Indonesia and Angana Banerji for Russia     

Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises

We investigate whether liquidity is an important price factor in the US corporate bond market. In particular, we focus on whether liquidity effects are more pronounced in periods of financial crises, especially for bonds with high credit risk, using a unique data set covering more than 20,000 bonds, between October 2004 and December 2008. We employ a wide range of liquidity measures and find that liquidity effects account for approximately 14% of the explained market-wide corporate yield spread changes. We conclude that the economic impact of the liquidity measures is significantly larger in periods of crisis, and for speculative grade bonds.     

Corporate finance and governance in emerging markets: A selective review and an agenda for future research

There are important organizational and behavioral differences between firms in emerging markets and those in developed markets. We propose a top-down approach to understand how key institutional forces shape the structures and policies of firms in emerging markets. We review a selective set of prior studies as well as papers included in this Special Issue in identifying government quality, state ownership, and financial development as critical institutional forces that shape the financing and governance of firms in emerging markets. We suggest that future research should pay attention to several important but unanswered topics related to informal enforcement, government incentives, family firms, and network organizations.