Early Warning System of Currency Crisis Based on Exchange Market Pressure: The Case of Vietnam

Abstract

The paper aims at identifying leading indicators and a suitable EWS model of a currency crisis in Vietnam based on a combination of parametric and non-parametric approach with the EMP index for period 1996-July 2012. The paper found that model in which dependent variable - CC is defined based on the EMP and other event, and all explanatory variables are expressed in its absolute values with window length of 2 months is outperformed for predicting a currency crisis in Vietnam. Empirical results suggested that probability of predicting a true currency crisis was 80.7 percent; probability of predicting a crisis-hit period with signal was 94 percent. In addition, empirical evidence concluded that real overvaluation, international reserves in import’s weeks, and domestic credit growth rate are leading indicators of a currency crisis in Vietnam. The other indicators such as deficits in trade balance, industrial production value, money supply growth rate could be a good indicator but are all insignificant.