USA and International Banking System Interaction: Have the Effects of 9/11 Dissipated?

30 Pages Posted: 8 Feb 2006

See all articles by John L. Simpson

John L. Simpson

Curtin University - Centre for Research in Applied Economics

Date Written: November 2005

Abstract

The "9/11" terrorist attacks in the USA saw a tragic loss of lives and property. This paper provides evidence that there were also substantial effects on the USA banking system and spillover effects to other country banking systems. Regression and vector autoregressive analysis of political risk modified international banking market models is undertaken using country banking stock price index returns and pure political risk ratings data. Samples of developed and developing country banking systems interacting with the USA and the world banking systems are investigated. Structural breaks in the data, due to the terrorist attacks, are found. Over the full period of the study, the USA banking variable, in combination with the world banking variable, is shown to be exogenous in all of the sampled country banking systems when country political risk probabilities of default combined with country banking returns are taken into account. The interaction of these variables is found greater in magnitude after the terrorist attacks than before. There are implications in these findings for investors in international banking stocks deciding on portfolio diversification and for banking regulators deciding on appropriate levels of economic capital for banks within country banking systems. In essence, the paper suggests that political risk factors and extreme political acts need to be taken into account in analysis of bank stock returns.

Keywords: terrorist, 9/11, political risk, banking returns, world banking, USA banking, country banking

JEL Classification: F36

Suggested Citation

Simpson, John L., USA and International Banking System Interaction: Have the Effects of 9/11 Dissipated? (November 2005). Available at SSRN: https://ssrn.com/abstract=881714 or http://dx.doi.org/10.2139/ssrn.881714

John L. Simpson (Contact Author)

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

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