Comparative analysis of three methodologies for the prediction of currency crises

Abstract

This thesis examines the causes of the Asian exchange rate crisis and compares it to the EMS crisis. In 1997, emerging countries in Asia experienced financial crises. Previously in 1992, currencies in the European Monetary System had undergone the same experience. This was followed by Mexico in 1994. The objective of this thesis lies in the generation of useful insights from these crises. This thesis presents a comparison of South Korea, United Kingdom and Mexico, and then compares three different models for prediction. Previous studies of economic crisis focused largely on the manual construction of causal models using linear techniques. However, the weakness of such models stems from the prevalence of nonlinear factors in reality. This thesis uses a structural equation model to analyze the causes, followed by a neural network model to circumvent the linear model``s weaknesses. The models are examined in the context of predicting exchange rates.