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Contagion effect due to Lehman Brothers’ bankruptcy and the global financial crisis - From the perspective of the Credit Default Swaps’ G14 dealers

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  • Irfan Akbar Kazi
  • Suzanne Salloy

Abstract

This article investigates the dynamics of conditional correlation among the G14 banks’ dealer for the credit default swap market from January 2004 until May 2009. By using the asymmetric dynamic conditional correlation model developed by Cappiello, Engle and Sheppard (2006), we examine if there is contagion during the global financial crisis, following Lehman Brothers’ bankruptcy of September 15th, 2008. The main contribution of this article is to analyze if the interdependence structure between the G14 banks changed significantly during the crisis period. We try to identify the banks which were the most or the least affected by losses induced by the crisis and we draw some conclusions in terms of their vulnerability to financial shocks. We find that all banks became highly interdependent during Lehman Brothers’ bankruptcy (short term impact), but only some banks faced high contagion during the global financial crisis (long term impact). Regulators who try to reinforce banks’ stability with the Basel 3 reforms proposals should be interested by these results.

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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2013-6.

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Length: 49 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:drm:wpaper:2013-6

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Keywords: Financial Crisis; Contagion; Credit Default Swap; Lehman Brothers; Asymmetric Dynamic Conditional Correlation;

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  1. Heiko Hesse & Nathaniel Frank & Brenda González-Hermosillo, 2008. "Transmission of Liquidity Shocks," IMF Working Papers 08/200, International Monetary Fund.
  2. Douglas W. Diamond & Raghuram G. Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," American Economic Review, American Economic Association, American Economic Association, vol. 99(2), pages 606-10, May.
  3. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  4. Kristin Forbes, 2012. "The "Big C": Identifying Contagion," NBER Working Papers 18465, National Bureau of Economic Research, Inc.
  5. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series, European Central Bank 0204, European Central Bank.
  6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  7. Athanasoglou, Panayiotis & Brissimis, Sophocles & Delis, Matthaios, 2005. "Bank-specific, industry-specific and macroeconomic determinants of bank profitability," MPRA Paper 32026, University Library of Munich, Germany.
  8. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen, 2003. "Multivariate GARCH models: a survey," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  10. Go Tamakoshi & Yuki Toyoshima & Shigeyuki Hamori, 2012. "A dynamic conditional correlation analysis of European stock markets from the perspective of the Greek sovereign debt crisis," Economics Bulletin, AccessEcon, vol. 32(1), pages 437-448.
  11. Wang, Ping & Moore, Tomoe, 2012. "The integration of the credit default swap markets during the US subprime crisis: Dynamic correlation analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(1), pages 1-15.
  12. Christian Hafner & Philip Hans Franses, 2009. "A Generalized Dynamic Conditional Correlation Model: Simulation and Application to Many Assets," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 28(6), pages 612-631.
  13. Mathieu Gex & Virginie Coudert, 2010. "Le règlement des défauts sur le marché des credit default swaps : le cas de Lehman Brothers," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 97(2), pages 15-34.
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