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The Spatial Probit Model – An Application to the Study of Banking Crises at the End of the 90’s

Victor Mendes (), Andrea Amaral and Margarida Abreu ()

No 6623, EcoMod2014 from EcoMod

Abstract: We use a spatial Probit model to study the effect of contagion between banking systems of different countries on the probability of a systemic crisis in one county. Applied to the late 90’s banking crisis in Asia we show that the phenomena of contagion is better seized using a spatial than a traditional Probit model. Unlike the latter, the spatial Probit model allows one to consider the cascade of cross and feedback effects of contagion that result from the outbreak of one initial crisis in one country or system. These contagion effects may result either from business connections between institutions of different countries or from institutional similarities between banking systems The paper is structured as follows. The spatial Probit model is presented in section 2. In section 3 we discuss the dataset and variables used in the empirical application. Results are discussed (and compared with those from the traditional model) in section 4, while section 5 concludes the paper. The study of banking crisis through a traditional Probit model isn’t satisfactory. The results from the spatial Probit model are statistically more reliable, and more robust than those from the traditional model. If the observations are inter-related, the maximization of the usual likelihood function in the Probit model produces inconsistent and inefficient estimators. The estimates here obtained for the traditional Probit model are an example of it, and this lack of quality of the estimators and of reliability of the statistic inference probably explains why previous studies didn’t find any significant relationship between the occurrence of crises and the characteristics of the banking sector (Eichengreen and Rose 1998) or bank liquidity (Demirgüç-Kunt and Detragiache 1998b, Domaç and Peria 2003). Contagion is crucial to understanding the occurrence of systemic banking crises but the phenomenon may result from business connections between institutions or from similarities between banking systems. However, our results show little sensitivity to the proximity concept used, which could be a sign that the contagion channels are diverse. This is also, without a doubt, a sign of the robustness of the phenomenon of contagion.

Keywords: developed and developing countries; Macroeconometric modeling; Monetary issues (search for similar items in EconPapers)
Date: 2014-07-03
New Economics Papers: this item is included in nep-ban and nep-ure
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