23 May 2005 Forecasting of magnitude and duration of currency crises based on the analysis of distortions of fractal scaling in exchange rate fluctuations
Author Affiliations +
Proceedings Volume 5848, Noise and Fluctuations in Econophysics and Finance; (2005); doi: 10.1117/12.609400
Event: SPIE Third International Symposium on Fluctuations and Noise, 2005, Austin, Texas, United States
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.
© (2005) COPYRIGHT Society of Photo-Optical Instrumentation Engineers (SPIE). Downloading of the abstract is permitted for personal use only.
Olga Yu. Uritskaya, "Forecasting of magnitude and duration of currency crises based on the analysis of distortions of fractal scaling in exchange rate fluctuations", Proc. SPIE 5848, Noise and Fluctuations in Econophysics and Finance, (23 May 2005); doi: 10.1117/12.609400; https://doi.org/10.1117/12.609400
PROCEEDINGS
10 PAGES


SHARE
KEYWORDS
Fractal analysis

Systems modeling

Statistical analysis

Statistical modeling

Algorithm development

Chaos

Classification systems

RELATED CONTENT


Back to Top