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Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers

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  • Dumontaux, Nicolas
  • Pop, Adrian
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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 of 2007. Through the use of stock market data and credit default swap (CDS) spreads, this paper examines investors’ reaction to Lehman's collapse in an attempt to identify a spillover effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damage was limited to the largest financial firms; (ii) the institutions most affected were the surviving “non-bank” financial services firms; and (iii) the negative effect was correlated with the financial conditions of the surviving institutions. We also detect significant abnormal jumps in CDS spreads that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities assigned to the surviving financial firms.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1572308913000259
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    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 9 (2013)
    Issue (Month): 3 ()
    Pages: 269-286

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    Handle: RePEc:eee:finsta:v:9:y:2013:i:3:p:269-286
    Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

    Keywords: Bank failures; Systemic risk; Too-big-to-fail; Contagion; Market discipline; Credit default swap;

    Find related papers by JEL classification:

    • 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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    Cited by:

    1. Bessler, Wolfgang & Kurmann, Philipp, 2014. "Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 151-166.
    2. Noureddine BENLAGHA & Slim MSEDDI, 2016. "The Macroeconomic And Financial Impacts Of European Crisis On Saudi Arabia," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 16(1).

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