Financial Crisis Modeling and Prediction with a Hilbert-EMD-Based SVM Approachs

Introduction

In the past decades, some important economic and financial events like the Black October 1987, the December 1994 devaluation of the Mexican peso, and the October 1997 Asia financial turmoil after the devaluation of the Thai baht justify the considerable concerns with financial and currency crisis in the financial literature. These unprecedented and peculiar crisis events brought large change not only to their economy but also to their society, and since then much attention has been focused on study of the financial crisis from the theoretical and empirical standpoints (Flood & Marion, 1999; Goldstein, 1996; Kaminsky, Lizondo, & Reinhart, 1998; Sachs, Tornell, & Velasco, 1996). The main reason for much research attention is that financial market practitioners have different reasons for undertaking financial crises analysis. For example, macro policymakers are interested in leading indicators of pressure on economic growth; market participants are increasingly concerned to measure and limit their risk to large currency fluctuation; and financial regulators are keen to understand the currency risk exposure of the institutions they supervise (Yu, Lai, & Wang, 2006).

In order to predict whether one country will reach financial crisis level, it is important to be clear exactly how a crisis is defined. Much relevant literature looks at crisis indices (termed currency pressure indicators) defined as weighted sums of percentage change in exchange rates, interest rates and foreign currency reserves (Kumar, Moorthy, & Perraudin, 2003). Use of such indices is appropriate if one views crises from the view of a macro policymaker and is equally interested in “successful” and “unsuccessful” speculative attacks. From the standpoint of an investor, manager of foreign reserve positions, or a macro policymaker who cares primarily about a “successful attack” on the currency, it is more appropriate to consider a simpler definition of financial crisis based on large depreciations of currency exchange rates. To distinguish our research from those of studies which employ currency pressure indicators, a large devaluation of currency which far exceeds previous devaluations is defined as a financial crisis event.

In the existing studies, much effort has been made to build an appropriate model that could detect a possible crisis in advance. Accordingly various financial crisis forecasting models and early warning systems (e.g., Edison, 2000; Frankel & Rose, 1996; Goldstein, Kaminsky, & Reinhart, 2000; Kim, Hwang, & Lee, 2004; Kim, Oh, Sohn, & Hwang, 2004; Yu et al., 2006) have been constructed. In general, there are four types of financial crisis modeling and analysis model. The first type is to use structural models to analyze the financial crisis. There are case studies into specific financial episodes, often employing explicit structural models of balance of payments crises. Notable examples include Blanco and Garber (1986), Cumby and van Wijnbergen (1989), Jeanne and Masson (2000), Cole and Kehoe (1996), and Sachs et al. (1996). These studies are informative about the episodes in question and revealing with regard to structural model proposed by some theorists (Kumar et al., 2003).