The valuation effects of the Mexican debt crisis: a re-examination

Abstract

The valuation effects of the Mexican debt crisis are re-examined in a new way. Instead of concentrating upon the announcement of the Mexican debt moratorium, like some previous work, the valuation effects are investigated for eight major events that occurred over a period of two years, events which characterized the entire crisis. A multivariate regression model is applied to three portfolios of returns: high Mexican debt-exposure banks, low debt-exposure banks, and banks without less developed country (LDC) debt exposure. Significant wealth effects are observed for all three portfolios for various events. There is a significant increase (decrease) in the beta for the high exposure (no exposure) banks subsequent to the announcement of a debt-restructuring agreement between Mexico and its major creditor banks. Similar results are also observed for the residual variance, suggesting that the Mexican debt crisis may have contributed to changes in the risk of high-exposure, low-exposure and no-exposure banks.