Title

A Cardan’s Discriminant Approach to Predicting Currency Crashes

Publication Type

Journal Article

Publication Date

2-2007

Abstract

This paper models large swings in exchange rates by introducing nonlinearity via the generalized normal (GEN) distribution [Lye, J.N., Martin, V.L., 1993. Robust estimation, nonnormalities and generalized exponential distributions. Journal of the American Statistical Association 88, 261-267]. As the distribution allows for bimodality, a switch between modes may give rise to currency crashes. A statistic known as Cardan's discriminant, based on the shape parameters of the GEN, is used to detect bimodality. The Cardan's discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of International Money and Finance

Volume

26

Issue

1

First Page

131

Last Page

148

ISSN

0261-5606

Identifier

10.1016/j.jimonfin.2006.08.001

Publisher

Elsevier