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The 2007-2009 Financial Crisis: Changing Market Dynamics and the Impact of Credit Supply and Aggregate Demand Sensitivity

Author

Listed:
  • Theoharry Grammatikos
  • Robert Vermeulen

    (LSF)

Abstract

This paper highlights the impact of credit supply and aggregate demand sensitivity on 91 US industries stock performance during the 2007-2009 financial crisis. We account explicitly for changes in the market model and investigate, next to stock returns, the changes in systematic risk and idiosyncratic return induced by the financial crisis. The results show that leverage has a significantly positive effect on systematic risk changes during the financial crisis. After accounting for the change in systematic risk, the crisis induced idiosyncratic return is significantly related to industry leverage and the industry s sensitivity to aggregate demand. A subsequent analysis shows that both leverage and demand sensitivity have economically large effects on industry performance during the crisis.

Suggested Citation

  • Theoharry Grammatikos & Robert Vermeulen, 2012. "The 2007-2009 Financial Crisis: Changing Market Dynamics and the Impact of Credit Supply and Aggregate Demand Sensitivity," DEM Discussion Paper Series 12-8, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:12-8
    as

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    File URL: http://wwwen.uni.lu/content/download/53132/634585/file/The%202007-2009%20Financial%20Crisis_Changing%20Market%20Dynamics%20and%20the%20Impact%20of%20Credit%20Supply%20and%20Aggregate%20Demand%20Sensitivity_2012%20(8).pdf
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    Citations

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    Cited by:

    1. Heather D. Gibson & Stephen G. Hall & George S. Tavlas, 2014. "Doom-loops: The Role of Rating Agencies in the Euro Financial Crisis," Discussion Papers in Economics 14/16, Division of Economics, School of Business, University of Leicester.

    More about this item

    Keywords

    financial crisis; systematic risk; credit supply; aggregate demand;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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