Future Exchange Pressure Risk Score (FEPR): Predicting Exchange Market Pressure in Emerging Economies

Emerging economies remain vulnerable to abrupt exchange rate depreciation and reserve losses, creating a need for early warning tools that distinguish current pressure from vulnerabilities that may precede future stress. This study developed the Future Exchange Pressure Risk Score (FEPR), using annual data for 19 emerging economies over the time frame 2000–2024. Three components make up the foundation of the FEPR: External Vulnerability Fundamentals (EVF), External Flow Fragility (EFF), and contemporaneous Exchange Market Pressure (EMP). In order to evaluate how well their model worked, they created a new way of testing it by using training periods 2000–2013, purging data in 2014 and 2015, training-only pre-processing and estimating EMP thresholds. Then they used the remainder of the sample for evaluating performance from 2016 to 2022. They found that the standard three-component model had a test ROC-AUC of 0.763 and test PR-AUC of 0.602. However, more importantly, they were able to demonstrate that EVF and EFF jointly provided additional predictive value beyond contemporaneous EMP. Specifically, the full model improved upon the models that relied solely on contemporaneous EMP with respect to both discrimination and loss functions, while the joint training sample country-clustered Wald test produced a [Formula: see text]-value of 0.0014. With respect to which pillar was providing the greatest amount of forward-looking information regarding future EMPs, the authors concluded that EFF was providing the most consistent amounts of forward-looking information. On the other hand, while they did find some evidence supporting the role of EVF in predicting future EMPs, those findings were less generalizable across definitions. As such, the primary contribution of the paper is demonstrating the ability to estimate and rank panel-relative high EMP risks rather than provide definitive warnings about crises or predict probabilities of future crises.