The results of our intervention analysis regressions are presented in Table 11.2. In general, our results show that the market rapidly assimilated news of the five major international defaults and reschedulings. None of our three portfolios show any significant abnormal return behavior prior to the default date(s). The equity return behavior of only two of the portfolios, the multinational banks and the regional wholesale banks, shows a negative reaction to news of international defaults and reschedulings on the default day. The average negative abnormal return for the multinational banks was -1.2 percent (t = -3.03) and for the regional wholesale banks -0.73 percent (t = -2.29). The regional consumer banks show no negative abnormal performance on the default date; however, all three portfolios show a one- day positive reversal within five days following the default.
These results should be interpreted in light of the fact that all the banks in the sample, including the wholesale and consumer, are reviewed by Salomon Brothers and listed on the New York (NYSE) or American (AMEX) exchanges. These are among the nation's largest banks; thus the distinction between multinational, consumer, and wholesale is a matter of degree, not a clear and sharp differentiation. Each of these banks had some degree of Latin loan exposure. Thus, the lack of negative abnormal returns to the consumer banks is strong evidence against the pure contagion hypothesis.
Finally, we note that in none of the three portfolios was there a significant shift in intercept or slope. Indeed, the absolute magnitude of the shift coefficients is quite small as well as statistically insignificant. Thus our results are not dependent on the time period selected for estimation of the regression parameters.
This chapter is a study of the effects of the international debt crisis on U.S. bank equity returns. Following Box and Tiao5 we use intervention analysis to test for changes in the underlying security return generating process caused by news of international defaults and reschedulings. We postulate that there are three possible mechanisms by which the international debt crisis may have affected U.S. bank equity returns. First, the debt crisis may affect all bank equity value. According to this view, due to the interlocking nature of the financial system, firm-specific events may cause a loss of confidence in the system as a whole. Following Aharoney and Swary6 we refer to this as the "pure contagion effect" hypothesis. Second, the debt crisis may affect only the multinational banks. This hypothesis, in contrast to "pure contagion effect," states that investors are able to sort out each individual bank's international exposure and adjust equity values accordingly. Third, only the multinational banks are not affected. According to this hypothesis, only the multinational banks, being the largest, enjoy an informal federal guarantee.