AIG's announcements, Fed's innovation, contagion and systemic risk in the financial industries

M. Faisal Safa, M. Kabir Hassan and Neal C. Maroney

Applied Financial Economics, 2013, vol. 23, issue 16, 1337-1348

Abstract: We examine the effects of the American International Group, Inc.'s (AIG's) loss announcements and the Federal Reserve's subsequent innovation in the financial sector. Analysis of seemingly unrelated regression on the returns of four financial industries -- banking, insurance, brokerage firms and savings and loan institutions (S&Ls) for the period 5 September 2007 to 31 December 2008 reveals that, the Federal Reserve's announcements on 16 September 2008 and on 8 October 2008 to pledge $85 billion and $37.8 billion, respectively, to save the AIG, have the most impact on the financial industries. All four industries are sensitive towards shocks in short- and long-run interest rate returns and market returns. We find evidence of significant contagion effect between insurance and banking industries and incremental systemic risk in all financial industries after the bailout by the Federal Reserve. We do not find any significant evidence supporting the Federal Reserve's perception of AIG to be too-big-to-fail.

Date: 2013
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DOI: 10.1080/09603107.2013.815309

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