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Panel cointegration tests in finite sample analyzing banking stability

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  • Hassan Belkacem Ghassan

    (Umm Al-Qura University (Previously)
    Economic & Financial Quant-Modelling Consultancy)

Abstract

There is no consensus about the financial resilience and stability of Islamic banks compared to conventional banks, particularly during periods of financial turmoil. This paper uses novel panel cointegration tests (Westerlund in JAE 23:193–233, 2008; Di Iorio et al. in EE 46:1271–1300, 2014; Hadri et al. in EJ 18:363–411, 2015), accounting for cross-sectional dependence and serial correlation. It investigates the cointegrating equation of banking stability through an illustrative application. Westerlund and Hadri et al. tests confirm that some banks are cointegrated, but do not specify which units drive it. The bootstrap panel cointegration test of Di Iorio et al. reveals that the cointegrating relationship holds only in domestic-oriented banks, rather than those oriented-abroad banks. Furthermore, the findings show that the bootstrap sequential test predominates, revealing specific sub-cointegration rather than entire panel cointegration. Within a mixed banking system, the stability of banks is not contingent on whether banks adhere to Islamic or conventional financing models, but rather on their interdependence.

Suggested Citation

  • Hassan Belkacem Ghassan, 2025. "Panel cointegration tests in finite sample analyzing banking stability," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 52(3), pages 369-391, September.
    • Handle: RePEc:spr:decisn:v:52:y:2025:i:3:d:10.1007_s40622-024-00417-9
    DOI: 10.1007/s40622-024-00417-9
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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