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The Impact of Latin American Debt Crisis on U.S., U.K., and Canadian Bank Stocks Louisiana State University LSU Digital Commons LSU Historical Dissertations and Theses Graduate School 1991 The mpI act of Latin American Debt Crisis on U.S., U.K., and Canadian Bank Stocks. Subbarao Venkata Jayanti Louisiana State University and Agricultural & Mechanical College Follow this and additional works at: https://digitalcommons.lsu.edu/gradschool_disstheses Recommended Citation Jayanti, Subbarao Venkata, "The mpI act of Latin American Debt Crisis on U.S., U.K., and Canadian Bank Stocks." (1991). LSU Historical Dissertations and Theses. 5189. https://digitalcommons.lsu.edu/gradschool_disstheses/5189 This Dissertation is brought to you for free and open access by the Graduate School at LSU Digital Commons. It has been accepted for inclusion in LSU Historical Dissertations and Theses by an authorized administrator of LSU Digital Commons. For more information, please contact [email protected]. INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely affect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand corner and continuing from left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6" x 9" black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. University Microfilms International A Beil & Howell Information Com pany 300 North Zeeb Road, Ann Arbor, Ml 48106-1346 USA 313/761-4700 800/521-0600 Order Number 9207511 The impact of Latin American debt crisis on U.S., U.K., and Canadian bank stocks Jayanti, Subbarao Venkata, Ph.D. The Louisiana State University and Agricultural and Mechanical Col., 1991 UMI 300 N. Zeeb Rd. Ann Arbor, MI 48106 THE IMPACT OF LATIN AMERICAN DEBT CRISIS ON U.S., U.K., AND CANADIAN BANK STOCKS A Dissertation Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College in partial fulfillment of the requirements for the degree of Doctor of Philosophy in The Interdepartmental Program in Business Administration by Subbarao V. Jayanti B.Sc./ Andhra University, India, 1971 M.Sc., Andhra University, India, 1973 August 1991 ACKNOWLEDGMENTS This dissertation benefitted from the help of many people. First, I would like to thank Geoffrey Booth, my chairman, for his constant encouragement and inspiration. His enthusiasm is contagious. Equally important is the contribution of Myron B. Slovin who provided valuable insights into the problem at hand. Chowdhury Mustafa was very helpful with every aspect of the GARCH model. I express my deep appreciation to them. I am also thankful to the other members of my committee: John Glascock, Bill Lane, Douglas McMillin, and Paul Hoffman for their valuable time. I acknowledge the help from William Staats, Kwei Tang, Upinder Dhillon, Erdal Gunay, John Hatem, Quang Do, Mimbo Kim, Venkat Chalasani, Joan Payne, Bessie Avera, and Kathy Bosworth. They lent a helping hand at various stages of the dissertation. I owe special thanks to my wife, Rama, who is a friend, philosopher, and guide to me. She was absolutely invaluable right from the conception of the idea of going for the Ph.D. through its successful completion. I am grateful to all my family members for their support and encouragement. Finally, the love and blessings of my parents guided me throughout. I dedicate this work to my parents. TABLE OF CONTENTS Page Acknowledgments ................................. ii List of Tables.................................. v Abstract........................................ ix CHAPTER IS INTRODUCTION ............................. 1 CHAPTER 2: LITERATURE REVIEW ........................ 7 A. Theoretical Explanations ................... 7 B. Empirical Studies .......................... 13 C. Chapter Summary............................ 24 CHAPTER 3S DESCRIPTION OP EVENTSAND D A T A ............ 26 A. Description of Events...................... 27 1. Borrower-induced Events ................ 28 2. Lender-induced Events .................. 32 3. Events Initiated by Borrower and Lender .. 33 4. External Events........................ 35 B. Institutional Background ................... 41 1. U.S. B a n k s ............................ 41 2. British B a n k s ...... 41 3. Canadian B a n k s........................ 43 C. Data Description........................... 45 1. U.S. B a n k s ............................ 45 2. British B a n k s ......................... 48 3. Canadian B a n k s ........................ 48 D. Chapter Summary............................ 49 CHAPTER 4: THEORY AND METHODOLOGY .................. 60 A. Theory........ ............................ 61 1. New Information Hypothesis ............. 61 2. Capital Regulation Hypothesis .......... 62 B. Methodology................................ 73 1. Event Study Method .................... 74 2. OLS Market M o d e l ...................... 75 3. GARCH Mo d e l ........................... 83 iii C. Testing of Hypotheses.................... 95 1. New Information Hypothesis ............. 95 2. Capital Regulation Hypothesis........ 97 D. Shift in Risk Characteristics............. 98 E. Chapter Summary .......................... 100 CHAPTER 5: MEASURING EXCESS RETURNS .................. 103 A. Distributional Properties of the Market Model Residuals........... .................. 103 B. Event Study Results ........................ 105 1. Borrower-induced Events ................ 105 2. Lender-induced Events................ 114 3. Events Initiated by Borrower and Lender .. 114 4. External Events..................... 115 5. On the Significance of Excess Returns before the Event..................... 123 C. Chapter Summary............................ 12 6 CHAPTER 6: HYPOTHESES TESTING ........................ 164 A. Results of Hypotheses Tests ................ 164 1. Borrower-induced Events ................ 164 2. External Events ........... ........... 174 B. Change in Risk Characteristics............ 178 C. Chapter Summary.......................... 181 CHAPTER 7! ANALYSIS OF BRITISH AND CANADIAN BANKS .... 204 A. Event Study Results on U.K. and Canadian Banks. 204 1. Borrower-induced Events .............. 204 2. Lender-induced Events .................. 209 3. Events Initiated by Borrower andLender .. 210 4. External Events...................... 210 B. Excess Returns: The Case of Canadian Banks .... 214 C. Chapter Summary.......................... 216 CHAPTER 8: SUMMARY, CONCLUSIONS, AND FUTURERESEARCH ... 236 BIBLIOGRAPHY ......................................... 240 VITA ................................................. 248 iv LIST OF TABLES Table Page 2.1 Theories Proposed to Explain Specific Events of the Latin American Debt Crisis............... 25 3.1 Sample of Events................................ 50 3.2 Chronological Distribution of Events........ 51 3.3 Sample of U.S. B a n k s ............................ 52 3.4 Latin American Debt Exposure of U.S. B a n k s ....... 54 3.5 Descriptive Statistics of the Sample of U.S. Banks (1982) ....................... 56 3.6 Descriptive Statistics of the Sample of U.S. Banks (1986) ................................... 57 3.7 Latin American Debt Held by the U.K. B a n k s ....... 58 3.8 Latin American Debt Held by the Canadian Banks .... 59 4.1 Distribution of Security Issuance by U.S. BHCs (1982-1986) .......................... 102 5.1 Descriptive Statistics of Market Model Residuals for Mexican Moratorium Event Using Ordinary Least Squares Method ................... 128 5.2 Maximum Likelihood Estimates of GARCH Market Model for Mexican Moratorium Event .............. 132 5.3 Goodness of Fit Test Results for High Exposure Group of U.S. Banks for Mexican Moratorium Event .. 13 6 5.4 Excess Returns and Cumulative Excess Returns around Mexican Moratorium Event Using OLS Model (according to exposure level) ................... 137 5.5 Average Excess Returns and Conditional Variance around Mexican Moratorium Event Using GARCH Model (Estimation period t = -260 to t = -11) ......... 139 5.6 Average Excess Returns and Conditional Variance around Mexican Moratorium Event Using GARCH Model (Estimation period t = -252 to t = -3) .......... 141 v 5.7 Excess Returns and Cumulative Excess Returns around Mexican Moratorium Event Using OLS Model (according to capital adequacy) .................. 142 5.8 Excess Returns and Cumulative Excess Returns around Bolivian Moratorium Event Using OLS Model (according to exposure level) .................... 145 5.9 Excess Returns and Cumulative Excess Returns around Bolivian Moratorium Event Using OLS Model (according to capital adequacy) .................
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