Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers |
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Institution: | 1. Banque de France, French Prudential Supervision Authority, Banking Studies Division, 61 rue Taitbout, 75436 Paris Cedex 09, France;2. University of Nantes (LEMNA), Institute of Banking & Finance, Chemin de la Censive du Tertre, BP 52231, 44322 Nantes Cedex 3, France |
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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; and (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. |
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Keywords: | Bank failures Systemic risk Too-big-to-fail Contagion Market discipline Credit default swap |
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