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Contagion Effects in the Aftermath of Lehman's Collapse: Measuring the Collateral Damage

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  • Nicolas Dumontaux

    (Banque de France - Banque de France)

  • Adrian Pop

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)

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    Abstract

    The spectacular failure of the 150-year old investment bank Lehman Brothers on September 15th, 2008 was a major turning point in the global financial crisis that broke out in the summer 2007. Through the use of stock market data and Credit Default Swap (CDS) spreads, this paper examines the investors' reaction to Lehman's collapse in an attempt to identify a contagion effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damages were limited to the largest financial firms; (ii) the most affected institutions were the surviving "non-bank" financial services firms (mortgage and specialty finance, investment services, and diversified financial services firms); (iii) the negative effect was correlated with financial conditions of the surviving institutions. We also detect significant abnormal jumps in the CDS spreads after Lehman's failure that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities for the surviving financial firms.

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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00695721.

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    Date of creation: 09 May 2012
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    Handle: RePEc:hal:wpaper:hal-00695721

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00695721
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    Related research

    Keywords: systemic risk; financial crisis; bank failures; contagion; bailout; regulation; Credit Default Swap;

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    1. Aharony, Joseph & Swary, Itzhak, 1996. "Additional evidence on the information-based contagion effects of bank failures," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 57-69, January.
    2. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
    3. Chitru S. Fernando & Anthony D. May & William L. Megginson, 2012. "The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers," Journal of Finance, American Finance Association, vol. 67(1), pages 235-270, 02.
    4. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
    5. Norden, Lars & Weber, Martin, 2004. "Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements," CEPR Discussion Papers 4250, C.E.P.R. Discussion Papers.
    6. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
    7. Adrian Pop & Diana Pop, 2009. "Requiem for Market Discipline and the Specter of TBTF in Japanese Banking," Working Papers hal-00419235, HAL.
    8. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    9. Blair, Roger D & Heggestad, Arnold A, 1978. "Bank Portfolio Regulation and the Probability of Bank Failure: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(1), pages 88-93, February.
    10. Cornell, Bradford & Shapiro, Alan C., 1986. "The reaction of bank stock prices to the international debt crisis," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 55-73, March.
    11. Larry D. Wall & David R. Peterson, 1989. "The effect of Continental Illinois' failure on the financial performance of other banks," Working Paper 89-9, Federal Reserve Bank of Atlanta.
    12. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    13. Schwert, G William, 1981. "Using Financial Data to Measure Effects of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 121-58, April.
    14. Pop, Adrian & Pop, Diana, 2009. "Requiem for market discipline and the specter of TBTF in Japanese banking," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1429-1459, November.
    15. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
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