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Proceedings Paper

Forecasting of magnitude and duration of currency crises based on the analysis of distortions of fractal scaling in exchange rate fluctuations
Author(s): Olga Yu. Uritskaya
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Paper Abstract

Results of fractal stability analysis of daily exchange rate fluctuations of more than 30 floating currencies for a 10-year period are presented. It is shown for the first time that small- and large-scale dynamical instabilities of national monetary systems correlate with deviations of the detrended fluctuation analysis (DFA) exponent from the value 1.5 predicted by the efficient market hypothesis. The observed dependence is used for classification of long-term stability of floating exchange rates as well as for revealing various forms of distortion of stable currency dynamics prior to large-scale crises. A normal range of DFA exponents consistent with crisis-free long-term exchange rate fluctuations is determined, and several typical scenarios of unstable currency dynamics with DFA exponents fluctuating beyond the normal range are identified. It is shown that monetary crashes are usually preceded by prolonged periods of abnormal (decreased or increased) DFA exponent, with the after-crash exponent tending to the value 1.5 indicating a more reliable exchange rate dynamics. Statistically significant regression relations (R=0.99, p<0.01) between duration and magnitude of currency crises and the degree of distortion of monofractal patterns of exchange rate dynamics are found. It is demonstrated that the parameters of these relations characterizing small- and large-scale crises are nearly equal, which implies a common instability mechanism underlying these events. The obtained dependences have been used as a basic ingredient of a forecasting technique which provided correct in-sample predictions of monetary crisis magnitude and duration over various time scales. The developed technique can be recommended for real-time monitoring of dynamical stability of floating exchange rate systems and creating advanced early-warning-system models for currency crisis prevention.

Paper Details

Date Published: 23 May 2005
PDF: 10 pages
Proc. SPIE 5848, Noise and Fluctuations in Econophysics and Finance, (23 May 2005); doi: 10.1117/12.609400
Show Author Affiliations
Olga Yu. Uritskaya, St. Petersburg State Polytechnic Univ. (Russia)

Published in SPIE Proceedings Vol. 5848:
Noise and Fluctuations in Econophysics and Finance
Derek Abbott; Jean-Philippe Bouchaud; Xavier Gabaix; Joseph L. McCauley, Editor(s)

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