Publications

By the end of 2008 the stock market collapsed after several months of tension and struggle. The financial crisis due to a downturn in housing prices, wrong uses of monetary and fiscal policies, and irresponsible behavior of private lenders and borrowers was one more episode in the financial turmoil that affected emerging market economies. The spreading crisis in emerging markets raised concerns about the financial stability of the banking system as a whole. Some analysts pointed out the risk of a contagion among international banks and, also, the systemic repercussions that the failure of large creditor banks might have on the domestic banking sector. In this project, we try to detect contagion effects within the Lebanese banking sector by examining the impact of the financial crisis on Lebanese banks' stock prices. This study will contribute to empirical evidence on bank contagion effects outside the United States, especially in emerging markets. We proceed in two steps to measure the impact of the financial market collapse on Lebanese banks and to detect possible contagion effects. First, using event study methodology, we compute Lebanese banks' stock returns for a number of events related to the financial crisis. In a second step, we regress individual banks' stock returns on their international exposure to determine whether the financial crisis lead to a general loss of confidence in Lebanese banks (contagion hypothesis) or whether investors successfully discriminated between banks according to their exposure to the international market (individual exposure hypothesis). The project will be organized as follows: Section (1) will be an introduction, in Section (2) we will present a historical view of the financial crisis, its major types, causes, theories. Section (3) will discuss the ultimate causes of the financial crisis and its impact on the world. Section (4) will be an overview of the banking system in general, and the effect of the financial crisis on this important sector as the banking sector is considered as one of the leading sectors in the Lebanese economy. Section (5) presents the competing hypotheses that may be put forth to explain the reaction of Lebanese banks' stocks prices, provides a detailed chronology of the financial crisis, and introduce the event analysis methodology and the cross section regression model used for testing the competing hypotheses. In section (5) we will present the results of the event study and of the regression analysis and we conclude.