This article is a perfect example of how discriminant analysis can be used in the field of economics and finance. A study conducted by Benzing Cynthia, published on August 1, 2000 uses discriminant analysis and regression to determine which macroeconomic variables are predictive of financial crisis in emerging countries.
Emerging countries were divided into two groups:
The first group of crisis countries had entered into either a stand-by agreement or an extended agreement with the International Monetary Fund between 1995 and 1999.
The second group of emerging countries, matched by region with the first group, consisted of countries who did not experience financial problems.
The discriminant analysis tested 18 variables related to liquidity, debt levels, current account deficits, and monetary policy to determine which variables were significantly different between the two groups. Then, with a dummy-dependent variable for crisis and non-crisis countries, regression was used to determine which variables had the highest joint predictive value.
The study found that the bank reserves to demand deposits ratio, exports to imports ratio, the percentage of growth in domestic credit, and the government spending to gross domestic product (GDP) ratio had predictive value.
Countries that faced financial distress had a higher bank reserves to demand deposits ratio and percentage of growth in domestic credit 12 months before financial distress. These same countries had a lower exports to imports ratio and government spending to GDP ratio.
Ref: http://www.allbusiness.com/finance/635773-1.html
Name: Mansi Dubey
Roll Number 12092
Finance Batch of 2009-11,
SIBM Bangalore.
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