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

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 - 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 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.

Suggested Citation

  • Nicolas Dumontaux & Adrian Pop, 2012. "Contagion Effects in the Aftermath of Lehman's Collapse: Measuring the Collateral Damage," Working Papers hal-00695721, HAL.
  • Handle: RePEc:hal:wpaper:hal-00695721
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00695721
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    References listed on IDEAS

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    1. Wall, Larry D. & Peterson, David R., 1990. "The effect of Continental Illinois' failure on the financial performance of other banks," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 77-99, August.
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    Cited by:

    1. Ranjeeni, Kumari, 2014. "Sectoral and industrial performance during a stock market crisis," Economic Systems, Elsevier, vol. 38(2), pages 178-193.

    More about this item

    Keywords

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

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