A Perspective On Predicting Currency Crises
Currency crises are difficult to predict. It could be that the authors are choosing the wrong variables or using the wrong models or adopting measurement techniques not up to the task. The authors set up a Monte Carlo experiment designed to evaluate the measurement techniques. In this study, the methods are given the right fundamentals and the right models and are evaluated on how closely the estimated predictions match the objectively correct predictions. They find that all methods do reasonably well when fundamentals are explosive and all do badly when fundamentals are merely highly volatile.