Bank Portfolio Exposure to Emerging Markets
and Its Effects on Bank Market Value
Gary S. Fissel, Senior Financial Economist
Division of Research and Statistics
Federal Deposit Insurance Corporation
Washington, DC
Email: gfissel@fdic.gov
Lawrence Goldberg, Professor of Finance
Department of Finance
University of Miami,
Coral Gables, FL 33124
Tel: 305 284-1869
Email: lgoldber@miami.edu
Gerald A. Hanweck, Professor of Finance
School of Management
George Mason University
4400 University Drive
Fairfax, VA 22030
and
Visiting Scholar, Division of Insurance and Research, FDIC
Tel: 703-993-1855
Email: ghanweck@gmu.edu
January, 2005
WORKING PAPER 2005 – 01
We would like to thank the participants in the FDIC Research Seminar Series, the George Mason
University School of Management, Finance and Accounting Seminar Series, and the Financial
Management Association session. In particular, we would like to thank an FMA discussant, David
Carter, and anonymous referees for helpful comments. The views expressed here represent those of
the authors and do not necessarily reflect those of the FDIC or its staff.
and Its Effects on Bank Market Value
Gary S. Fissel, Senior Financial Economist
Division of Research and Statistics
Federal Deposit Insurance Corporation
Washington, DC
Email: gfissel@fdic.gov
Lawrence Goldberg, Professor of Finance
Department of Finance
University of Miami,
Coral Gables, FL 33124
Tel: 305 284-1869
Email: lgoldber@miami.edu
Gerald A. Hanweck, Professor of Finance
School of Management
George Mason University
4400 University Drive
Fairfax, VA 22030
and
Visiting Scholar, Division of Insurance and Research, FDIC
Tel: 703-993-1855
Email: ghanweck@gmu.edu
January, 2005
WORKING PAPER 2005 – 01
We would like to thank the participants in the FDIC Research Seminar Series, the George Mason
University School of Management, Finance and Accounting Seminar Series, and the Financial
Management Association session. In particular, we would like to thank an FMA discussant, David
Carter, and anonymous referees for helpful comments. The views expressed here represent those of
the authors and do not necessarily reflect those of the FDIC or its staff.
Bank Portfolio Exposure to Emerging
Markets and Its Effects on Bank Market Value
Abstract
This study estimates a model of banking company equity returns taking into consideration book value and market value
measures of their exposure to emerging markets debt. In this estimation, general systematic market factors, such as the
rate of return on the S&P500 stock index and yields on a constant maturity 5-year Treasury note, are held constant such
that the exposure variables are accounting for effects due to banks’ exposure to emerging market debt. The results,
although not uniform among banking companies, support the hypothesis that the extent of exposure to emerging market
debt are factored into the valuation of banking company equity contemporaneously. The inclusion of a market value
indicator adds to the explanation of equity returns of some banks. It is also clear that knowing the extent of the
exposure on a book value basis is important information alone that may allow investors to take account of or evaluate
the effects of changes in banking company equity valuation from LDC debt exposures. We also perform an event study
for three major debt crises to determine whether the market recognizes the effects of these events on bank valuation.
The event study results show that there is little information from identifying the time period of the crises on banking
company equity returns. Explanations for this are that the information of these possible crises has been embedded in
bank changes in exposure and that the market valuation of the emerging market debt is already accounted for by our
model.
1
Markets and Its Effects on Bank Market Value
Abstract
This study estimates a model of banking company equity returns taking into consideration book value and market value
measures of their exposure to emerging markets debt. In this estimation, general systematic market factors, such as the
rate of return on the S&P500 stock index and yields on a constant maturity 5-year Treasury note, are held constant such
that the exposure variables are accounting for effects due to banks’ exposure to emerging market debt. The results,
although not uniform among banking companies, support the hypothesis that the extent of exposure to emerging market
debt are factored into the valuation of banking company equity contemporaneously. The inclusion of a market value
indicator adds to the explanation of equity returns of some banks. It is also clear that knowing the extent of the
exposure on a book value basis is important information alone that may allow investors to take account of or evaluate
the effects of changes in banking company equity valuation from LDC debt exposures. We also perform an event study
for three major debt crises to determine whether the market recognizes the effects of these events on bank valuation.
The event study results show that there is little information from identifying the time period of the crises on banking
company equity returns. Explanations for this are that the information of these possible crises has been embedded in
bank changes in exposure and that the market valuation of the emerging market debt is already accounted for by our
model.
1