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Exchange market pressure: an evaluation using extreme value theory, Barbora Zuzáková, 2014

Exchange market pressure: an evaluation using extreme value theory, Barbora Zuzáková, 2014

Exchange market pressure, exchange rate regime, extreme value theory, Hill estimator

This thesis discusses the phenomenon of currency crises, in particular it is devoted to empirical identification of crisis periods. As a crisis indicator, we aim to utilize an exchange market pressure index which has been revealed as a very powerful tool for the exchange market pressure quantification. Since enumeration of the exchange market pressure index is crucial for further analysis, we pay special attention to different approaches of its construction. In the majority of existing literature on exchange market pressure models, a currency crisis is defined as a period of time when the exchange market pressure index exceeds a predetermined level. In contrast to this, we incorporate a probabilistic approach using the extreme value theory. Our goal is to prove that stochastic methods are more accurate, in other words they are more reliable instruments for crisis identification. We illustrate the application of the proposed method on a selected sample of four central European countries over the period 1993 - 2012, or 1993 - 2008 respectively, namely the Czech Republic, Hungary, Poland and Slovakia. The choice of the sample is motivated by the fact that these countries underwent transition reforms to market economies at the beginning of 1990s and therefore could have been exposed to speculative attacks on their newly arisen currencies.
These countries are often assumed to be relatively homogeneous group of countries at similar stage of the integration process. Thus, a resembling development of
exchange market pressure, particularly during the last third of the estimation period, would not be surprising.