An Empirical Investigation of the Loan Concentration Risk in Latin America

Posted: 29 Aug 2005 Last revised: 7 Jul 2009

See all articles by Elena Kalotychou

Elena Kalotychou

Cass Business School, City, University of London

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Abstract

The paper sets out to explore the factors affecting the credit quality of the Latin American region. Specifically, a logit framework is employed based on macroeconomic and financial data to determine the causes of Latin American debt crises in the last two decades. The analysis uses a modification of the default indicator to explicitly incorporate country arrear capacity. A number of domestic and international signals are found to be important in determining earlier as well as recent incidents. Domestic fundamentals, however, bear a much heavier weight than global conditions, implying that policy-makers still enjoy some freedom in preventing crises by monitoring country vulnerability. Furthermore, the study focuses on the out-of-sample classification accuracy of the proposed estimator using various criteria and provides one-, two- and three-year-ahead forecasts for country default probabilities. Predictive performance is satisfactory with a reasonable reduction in accuracy in the out-of-sample period. Nevertheless, the findings indicate an upward bias towards type II errors.

Keywords: Credit risk, sovereign default, financial crises, logit modeling, forecast evaluation

JEL Classification: F34, G15, G21

Suggested Citation

Kalotychou, Elena and Staikouras, Sotiris, An Empirical Investigation of the Loan Concentration Risk in Latin America. Journal of Multinational Financial Management, Vol. 16, pp. 363-384, 2006, Available at SSRN: https://ssrn.com/abstract=792404

Elena Kalotychou (Contact Author)

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain

Sotiris Staikouras

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

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