Econometrics Methods for Predictability of Financial
Crises on Example Asian Crisis
E.A. Grebenyuk
V.A. Trapeznikov Institute of Control Sciences,
65 Profsoyuznaya, Moscow 117997
Moscow, Russia
lgreben@ipu.ru
Abstract—The fitness verification problem of the forerunners
of financial crises based on historical data with the econometric
methods is considered. This analysis of the presence of the
forerunners, and the events that are highlighted by leading
economists as forerunners (predictions) and attributes of crisis
an analysis we made on the example of the South Asian financial
crisis of 1997-1998, for the group of countries.
Keywords—financial crisis, precursors of crises, bubbles in
stock markets, co-integration of time series
I. INTRODUCTION
Financial Market is one of the key elements for both
national and worldwide economy. Reliable operation of the
Financial Market drives economic growth, sustainable
development of society and the achievement of national goals.
The destabilization of its induce in the destabilization of the
relations between economic actors. Banks, commercial
corporations, and government structures are under its negative
influence.
The phenomenon of crises lies in their inevitability, due to
the economic laws of the development of a market economy.
However, the given fact does not reduce the relevance of the
crises researches of aiming at the accumulation of experience
of overcoming crises and systematization of gathered data for
the organization of early preventive management.
The purpose of this study is not to attempt to predict crises,
but to check for the presence of signs of crises and /or their
forerunners (precursor)that precede or accompany the
upcoming crisis events using modern econometrics. During
this work, we made a study on real data of presence the signs
and forerunners by the example of the global South Asian
crisis, which affected countries such as Japan, Malaysia,
Singapore, Thailand, and Russia.
II. STATEMENT OF THE PROBLEM
Events that occur before the crisis begin and predict its
beginning with some probability; we will call the forerunners
of the crisis.
‹,(((
A.A. Budilov, E.A. Grebenyuk, I.D.Rodionov, N.M.
Selyuto,
Bauman Moscow State Technical University,
5 Baumanskaya 2-ya, Moscow, 105005
Moscow, Russia
an.budilov@gmail.com
Attributes are the events, the appearance of which we can e
consider as signals that the system is in a state of crisis.
Studies of the dynamics of financial crises, conducted by
leading economists [1-2], identified a number of forerunners
and attributes that can characterize the crisis or its beginning:
1. The emergence of bubbles in stock markets;
2 The changes in the ratio between the value of short-term
and long-term loans in favor of short-term loans before the
crisis, the effect of changes in prices of short-term loans on the
formation of prices for long-term loans;
3. The nature of the interrelations between the stock
indexes of countries that were not affected by the crisis and the
countries in which the crisis occurred is changing before the
crisis (for example, in Russia before 1997 the stock market
followed the US stock market, but shortly before the crisis, this
ratio was violated);
4. The change in the effective exchange rate a year before
the crisis becomes negative (and the dumping of the currency
by 15% analysts view as a financial crisis);
5. The acceleration of real GDP slows down a year before
the crisis and becomes negative during the crisis;
6. The interest rates increase before and during the crisis
(observed both before the crises and in other periods);
Following the above definitions, the first three
characteristics we can consider as forerunners and the last three
as attributes.
We analyzed macroeconomic indicators in order to find
forerunners and attributes preceding crises in each of the
countries: Japan, Malaysia, Singapore, and Russia, affected to
varying degrees by the global South Asian crisis. Experimental
data for analysis we obtained from [3].
III. METHODS AND RESULTS OF THE FORERUNNERS DETECTION

A. Bubbles detection in stock markets

The essence of the modern econometric approach to
detecting bubbles is to define them as periods in which prices
have explosive dynamics. The algorithm proposed by Phillips
and co-authors in [4] and generalized to the case of several
sequentially arising and collapsing bubbles in [5] is based on
procedures for sequential checking of the presence of a bubble
performed at each moment of obtaining a new observation.
This approach allows:
1. To determine the moments of occurrence and collapse of Fig. 1. Indices of RTS and Dow Jones
the bubble in the mode of obtaining current observations, in
contrast to the methods used previously that could establish the
presence of a bubble in the process only in a posteriori mode B. Change in the ratio of the value of short-term and long-
term credits
2. Determine in the mode of obtaining current observations
At the beginning of the crisis or immediately before it, the
the appearance and collapse of several consecutive bubbles.
ratio between the value of long-term and short-term interbank
Algorithm [5] is the execution procedure of the recursive loans is broken: short-term loans become more expensive than
right-sided unit root test. Algorithm [5], in contrast to [4] does long-term ones. In the period of instability preceding the crisis
not capture the starting point, both the end and the starting and at the time of its beginning, changes in the prices of short-
point are changing, whereby the algorithm can detect multiple term loans influence the change in the prices of long-term
successive bubbles. The algorithm was used to analyze the loans, while in more quiet periods the prices of long-term loans
stock market indices in the period preceding the crisis in either from the changes in short-term loans or the changes in
Russia, Japan, Malaysia, Singapore, and revealed the presence both series are not interconnected by time dependence.
of bubbles for each of the countries in question. To check for
To determine the boundaries of intervals in which changes
false alarms, the algorithm was tested on the US stock market
in the prices of short-term loans affect the long-term price
data. The results of the testing are shown in Table 1, which
changes, we will check whether Granger's causality changes
shows the dates of financial crises for each country and the
[6] between short-term and long-term investments. The
date of detected bubbles for the stock indexes indicated in the
Granger causality test checks whether lagged information on a
second column of Table 1.
variable Y provides any statistically significant information
about a variable X in the presence of lagged X. If not, then "Y
TABLE I. CHECKING THE PRESENCE OF BUBBLES IN PERIODS does not Granger-cause X." If
PRECEDING CRISES STYLES

Country Stock Dates of the

index beginning of crises
Dates of detected bubbles E(Yt+1|Yt,…, Y1, X1) = E(Yt+1|Yt,…, Y1) (1)
October - November 1995
Russia RTS august 1998
May - June 1996 then X does is not Granger cause for Y. Testing the ratio of
November - December the value of short-term and long-term credits for the presence
1996
January 1990, February - March 1986
of "Granger causality" for crises was conducted for Russia and
Japan
Nikkei
July1997-July December 1989 - July Malaysia in periods after the crises and before them. Table 2
225 shows the results of the Granger causality check. The null
1998 1990
Malaysi
KLCI July 1997 January 1995 -April 1997
hypothesis is checked: "changes in short-term rates do not lead
a to a change in long-term rates," the rejection of which means
December1995-January that short-term rates can lead to a change in long-term rates.
Singapo
STI June 1997 1996, July - November
re
1996 The last column of the table shows the values of P-value -
Dow the error probability when the null hypothesis is rejected. As
USA no bubbles detected
Jones
can be seen from the results presented in Table 2, during the
Fig. 1 shows the results of the bubble detection algorithm
crisis, we can reject the null hypothesis that "information about
for Russia and the United States. In the upper part of Fig. 1
the values of rates on short-term loans does not affect the
shows the RTS index and the Dow Jones index, and at the
values of long-term" with a probability of error close to zero.
bottom - the statistics of the algorithm at each point of
When the situation stabilizes, this dependence disappears.
receiving the next observation and the boundary of critical
values, the yield beyond which indicates the bubble, and
returning to the restricted area is a bubble collapse. The TABLE II. GRANGER CAUSALITY TEST RESULTS
significant financial crisis occurred in Russia in August 1988, Coun Rates for Rates for Testing
but a stock market crash or its crisis occurred in late October P-
try one-day monthly intervals
value
1997. loans loans
2 - January
Russia Ɇ,%25a Ɇ,%25 0.7727
1998 - 6 April
 Coun Rates for Rates for Testing
P- Uˆ  1
try one-day monthly intervals W
seUˆ 
value
loans loans
1998

7-April 1998, in the residual regression

Ɇ,%25 Ɇ,%25 - 25 5.E-13
August1998
19-Sept. 1997
Overnight One month -27-December 0.3275 residualt U * residualt 1  H t
1997
Malaysia
2-January
Overnight One month 1997 -18 July 7.E-72
differs from the Dickey-Fuller distribution. The distribution
1997 of this statistic and its critical values were obtained in [9] and
used in the Engle-Granger test and other tests for cointegration
C. Violation of the nature of the relationship between stock checking. The standard critical values of Dickey Fuller's
indices before the onset of the crisis s VWDWLVWLFVFDQRQO\EHXVHGLIWKHYDOXHRIĮLVNQRZQLQDGYDQFH
All-time series of stock indexes considered here, at time (for example, for some reasons of economic theory).The
intervals not including bubbles, are nonstationary series research of the stock Japanese indices Nikkei 255 and the USA
integrated of the first order, i.e., such series, the first (Dow Jones) showed the presence of cointegration until July
differences of which are stationary. Therefore, we can treat the 1987, after this relation was broken. Time series of stock
cointegration between them as the presence of a stationary indices Dow Jones and Nikkei 255 and, the time series
linear combination between series [7]. Let us check the obtained from the cointegrating equation Fitted and Residual
following assumption: if there is cointegration in some stable are presented in Fig. 2
period between the indices of the two countries, then in the
event of an unstable economic situation or crisis in one of
them, then the cointegration is disappeared.
Analysis of the presence or absence of cointegration at
various periods between the US stock index and the major
stock indices of the countries affected by the South Asian crisis
such as Singapore, Japan, Russia, Malaysia was carried out
using the Engle-Granger test. To perform this test we built a
cointegrating regression equation that reflects the dependence
of the values of the index y t of one of the two countries on the
Fig.2 – Cointegration of the stock markets of Japan and the USA
other xt :

Table 3 shows the values of the Engle-Granger statistics and

yˆ t cˆ  D̂ xt , (2) the probability of error in accepting the null hypothesis "there
is no cointegration between series" during periods of stability
and during periods of crisis growth.
where yˆ t , cˆ, D̂ - are estimates of the values of y t , the
coefficient and the constants of equation (2), respectively. To
TABLE III. RESULTS OF TESTING FOR COINTEGRATION
test the null hypothesis H0: "the series yt and xt are not
Coun Engle-
cointegrated," the Dickey-Fuller criterion is applied to the try Granger tau-
P-
Period
Period
value definition
"residual" time series: statistic
April 1996 -
-4.151 0.0888 beyond crisis
March 1997
residualt yt  yˆ t . Russia
-2.943 0.524
April 1997 -
January 1998
before and
during the
crisis
May 1996 -
The time series residualt includes not the actual -3.547 0.0417
March 1997
beyond crisis

deviations of the time series yt from its model, but only their Malaysia April 1997 - before and
-1.623 0.7134 January 1998 during the
estimates, since we construct it with using the estimate of crisis
D̂ obtained by constructing regression (2) by the least-squares -3.926 0.0165
January 1995 -
January 1996
beyond crisis
method. In the case of cointegration (the presence of a single Singapore February 1996 - before and
root for a number of "residues"), the distribution of Engle- -2.721 0.4099 January 1998 during the
Granger statistics crisis
January 1986 -
-2.953 0.0325 beyond crisis
November 1987
Japan
December 1987 - before and
-1.012 0.9764
January 1995 during the
 Coun Engle-
P- Period all countries we are considering affected by the crisis.
try Granger tau- Period
statistic
value definition However, this attribute, like the previous one, cannot serve as
crisis an indicator of the onset of the crisis, since we often observe it
with a delay
IV. CHECKING FOR ATTRIBUTES

A. Change in the exchange rate

The change in the exchange rate is the annual depreciation
of the currency against the US dollar (or other currency as a
reference) [1]. We calculate the value of the change by
formula:

' = (Cy – C) / Cy,

Fig. 4 – Real GDP growth rates
where C is the value of the rate in the current month, C୷ –
is the value of the exchange rate in the corresponding month of
the previous year. Fig. 3 illustrates the change in the exchange C. The growth of interest rates
rate of the Japanese yen (JPN), the Malaysian ringgit (MYS), Fig.5 shows the interest rates in Japan, Malaysia,
Thai baht (THA) and the Singapore dollar (SGP) for the period Singapore, and Thailand for the period from January 1986 to
from January 1988 to December 1999, in percent and the December 1999.
change in the exchange rate of the Russian ruble (RUS) from
January 1996 to December 1999 as in percent.

Fig. 5 Interest rates on deposits

Fig.3 – Change in the annual ratio of the exchange rate to the US dollar in
percent
This attribute cannot be used either for forecasting or for
determining the time of the crisis since it indicates the
maximum depreciation with delay and depends on the
preventive measures taken by the government. The threshold
value of depreciation at the time the crisis began was reached
only in Malaysia and Thailand. In Russia, the devaluation of
the dollar after the introduction of the currency corridor by the
government was set at 6% - 7%. The process ended with a
sudden sharp depreciation of the currency at the time of the
1998 crisis.
B. The slowdown in real GDP growth rates
The change in GDP was calculated by
The growth of interest rates is observed before the crisis
begins and during the crisis, as well as during periods of
instability that are not accompanied by a crisis.
V. CONCLUSION
Based on the results of the processing of real data, the
following conclusions can be drawn:
x In all of the countries we reviewed where the South
Asian crisis occurred, some bubbles precede the onset
of the crisis. However, the intervals between bubbles
and crises have different lengths, and we cannot use this
forerunner for forecasting of the exact date of the crisis.
x Shortly before the crisis and now of its start, prices of
short-term loans are higher than long-term credit prices
' GDP  GDP  GDP y y
x Pairing cointegration of countries with the Dow Jones
where GDP is the country's GDP in US dollars for the
current year, GDPy is the country's GDP in US dollars for
the previous year.
Fig. 4 illustrates the change in the gross domestic product
of Japan, Malaysia, Russia, Singapore, and Thailand. The
annual decline in GDP as a result of the crisis is observed in
and have an impact on the formation of them.
index (or other index selected as the lead) is violated, or
if the stock market of the "pre-crisis" country begins to
fall, or if it has financial bubbles. In all cases considered
by us, no later than two years after the violation of
cointegration links, a systemic crisis begins”.
 x The attributes of crises that we examine mainly have
been found at the height of the crisis and can rarely
serve as pre-emptive indicators, but they are necessary
conditions accompanying the development of the crisis.
x The South Asian crisis in Japan took place according to
a scenario somewhat different from the other countries,
because the country, practically did not recover from
the crisis of 1990. The attributes and the forerunners of
the crisis of 1997-1998 were not found.
The study carried out in this article to verify the fulfillment
of the foregoing set of forerunners for the crises in the South
Asian region confirms both their existence for most of the
countries under consideration and the feasibility of using
methods of econometric analysis for their detection.
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