Early Warning System Of Twin Crises Based On Projection Pursuit Model

Because the scope and severity affected by the U.S.sub-loan crisis are far more than the previous financial crises,financial risk aversion has been the main tasks of the macroeconomic regulations and controls.Affected countries have focused on the prevention of twin crises.The innovation of this paper is to combine the early warning system of twin crisis with the projection pursuit model.The paper analyzes the risk factors of macro economy, currency and banking system.The calculating results show that KLR foreign exchange market pressure index was beyond the lowest warning level more than five times in 2007 due to the frequently changing in interest rates,the higher inflation rate and the appreciation trend of RMB;banking institutions are in the security status after measurements taken by the government to improve the operational effectiveness in these years.By analyzing the risk factors of twin crises and the previous studies,the paper selects the early warning indicators from macro economy,currency and banking system. A early warning system of twin crises based on projection pursuit model is constructed to converse the multiple factors evaluation into single factor evaluation aiming at the multiple factors comprehensive evaluation problems.Through the empirical analysis of the sample data from 2000 to 2008,the eigenvalues can be divided into two parts for the line before and after 2005 to zero axis according to the numerical size;and they also can be divided into three categories based on the main trend:from 2000 to 2003 as the first; from 2003 to 2006 as the second and 2006 to 2008 as the third.The results show the same characteristics as the KLR that the greatest possibility of twin crises is in 2007. Finally,the paper analyzes the effectiveness of the empirical results contacting which to the overall economic situation in 2007.It proves the feasibility and practicality of the combination of the projection pursuit model with early warning system of twin crises.