The Banking Exposure to International Lending: Regional Differences or Common Fundamentals?

28 Pages Posted: 4 Nov 2005

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 present study unveils the importance of regional characteristics of sovereign debt crises in Latin America and South East Asia. It proposes and empirically corroborates a refinement of the logit approach, for assessing sovereign risk, which draws upon a region-specific parameterization - composite estimator. The analysis identifies some common features of debt crises that largely reflect domestic solvency, liquidity factors and, to a lesser extent, trade-balance variables and external shocks. Nonetheless, heterogeneity effects and regional signals point towards the use of region-specific models. Such approach depicts specific risk factors such as openness and debt burden for Latin America and reserves, output and government expenditure for Asia, thereby suggesting distinctive aspects to debt crises. Out-of-sample forecast comparisons further support the use of the composite estimator. The latter outperforms the simple pooled and random effects approach on the basis of various criteria, albeit slightly biased towards false non-crises predictions.

Suggested Citation

Kalotychou, Elena and Staikouras, Sotiris, The Banking Exposure to International Lending: Regional Differences or Common Fundamentals?. Financial Markets, Institutions & Instruments, Vol. 14, No. 4, pp. 187-214, November 2005. Available at SSRN: https://ssrn.com/abstract=813308

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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