Foreign exchange risk hedging in the context of speculative revaluation attacks

Abstract

Purpose

The purpose of this paper is to propose predictive models of speculative revaluation attacks, which would facilitate currency risk hedging in emerging and developed countries.

Design/methodology/approach

The purpose of this paper is achieved using the methodology of multiple triangulation. Paper combines different theoretical perspectives (three generations of speculative attack models), two sources of data (emerging countries and developed countries) and three methods (logit regression, probit regression and artificial neural networks, ANN) for identification of leading indicators and forecasting of speculative attacks. Combination of multiple observations (data), underlying theories and methods allowed achieving least biased results.

Findings

A list of leading indicators of speculative revaluation attacks was generated based on previous researches and three generations of speculative attacks' models. Qualitative and quantitative differences of speculative revaluation attacks in emerging and developed countries were identified. The decision matrix of currency risk hedging in the context of speculative devaluation and revaluation attacks was proposed.

Research limitations/implications

Although the sample of this researcher includes a wide range of countries (65 in total), their separation into developed and emerging countries is arbitrary (in the course of 35 years some countries have changed the status from emerging towards developed). The initial list of leading indicators is limited, includes mostly economic variables. It could be improved by encompassing political variables, credit ratings, consumer and business confidence indices.

Practical implications

Developed predictive models of speculative revaluation attacks may significantly reduce important element of risk – uncertainty – and, consequently, the cost of financial hedging.

Originality/value

This paper is one of the first public attempts to apply alternative methodology of ANN for forecasting speculative attacks. The results showed that latter method is more accurate than probit and logit regressions. Also, to the author's best knowledge, this is a first public attempt to separately analyse the phenomenon of speculative revaluation attacks.

Citation

Maciulis, N. (2008), "Foreign exchange risk hedging in the context of speculative revaluation attacks", Baltic Journal of Management, Vol. 3 No. 3, pp. 266-288. https://doi.org/10.1108/17465260810902360