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

Nicolas Dumontaux and Adrian Pop ()
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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

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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; (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.

Keywords: bank failures; systemic risk; bailout; too-big-to-fail; contagion; financial crisis; regulation; market discipline; credit default swap (search for similar items in EconPapers)
Date: 2013-09
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Citations: View citations in EconPapers (3)

Published in Journal of Financial Stability, 2013, 9 (3), pp.269-286. ⟨10.1016/j.jfs.2013.04.001⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04212929

DOI: 10.1016/j.jfs.2013.04.001

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