Currency Crisis In Theory And Empirical

In this paper, we have showed some colours on the so-called "classic currency crises" since 1980 to give readers some concept of currency crises. After that, we have systematically reviewed two generations of currency crisis theory. Using "event study", we have tested the hypothesis that the shadow exchange rate equals fixed exchange rate when currency crisis occurs, which is an important conclusion from currency crises theory, and found that shadow exchange rates were significantly higher than fixed exchange rate. Our theory development for the first time proves that the realised real return for international capital contains information for expected yield, which enables us to use yield differential of financial assets in different countries to predict currency crises. Our empirical results from historical data of 19 countries in 25 years (1975-2000) show that the return differential of equity market has good prediction power for currency crises. Our out-sample evidences also shows that our model does well in predicting recent Argentina crisis.