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

Author

Listed:
  • Nicolas Dumontaux

    (Centre de recherche de la Banque de France - Banque de France)

  • Adrian Pop

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

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; (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.

Suggested Citation

  • Nicolas Dumontaux & Adrian Pop, 2013. "Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers," Post-Print hal-04212929, HAL.
    • Handle: RePEc:hal:journl:hal-04212929
    DOI: 10.1016/j.jfs.2013.04.001
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    Cited by:

    1. Yousaf, Imran & Riaz, Yasir & Goodell, John W., 2023. "The impact of the SVB collapse on global financial markets: Substantial but narrow," Finance Research Letters, Elsevier, vol. 55(PB).

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