Onset of emerging market crises with Probit model

Abstract

This paper examines the relative strength of factors in predicting the onset of a financial crisis in emerging markets during the 1990s. We estimate a probit model based on the quarterly data of 18 countries. The results suggest that mis-management in the economy and banking system, shifts in international conditions, and the depth of contagion effects are strongly associated with the likelihood of a crisis. A careful analysis of the probability distributions shows that our predictions are close to being correct in over 90% of the cases.