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

How do equity markets react to COVID-19? Evidence from emerging and developed countries

“… Fernando, May, and Megginson (2012) prove that the stock markets experienced 5% losses during the Lehman collapse as the culminating event of the 2007–2008 global stock market collapse. The Lehman collapse’s shockwave has also been documented across different financial institutions ( Dumontaux & Pop, 2013 ; Johnson & Mamun, 2012 ) and different countries ( Mensi, Hammoudeh, Nguyen, & Kang, 2016 ). Existing studies also documented that the 2007–2008 global stock market collapse was also accompanied by greater stock market volatility and trading volumes ( Anand, Irvine, Puckett, & Venkataraman, 2013 ; Hoffman, Post, & Pennings, 2013 ).…”

Banking Beyond Bucks

“…Previous research shows that banks that are interconnected, and those that are more similar to failing institutions, generally suffer more when the respective institution fails (Dumontaux and Pop, 2013;Ivashina and Scharfstein, 2010a). We start by investigating whether banks that are interconnected to Lehman, experience greater negative effects on the market.…”

“…Our analysis is therefore two-fold. First, based on the findings of Dumontaux and Pop (2013) and Ivashina and Scharfstein (2010a), that the shock coming from the bankruptcy of Lehman affected other financial institutions negatively, we investigate whether the commonality of the syndicated loan portfolio between individual banks and Lehman drives heterogeneity in market reactions on individual banks around Lehman's bankruptcy. Similar to Iyer and Peydro (2011) and Ivashina and Scharfstein (2010a), we find that both the effect on equity returns and CDS prices was stronger for banks whose loan portfolio was strongly interconnected with that of Lehman.…”

“…This stream of literature includes studies investigating the effects of failures of large financial institutions on the performance of the surviving institutions (e.g. Aharony and Swary, 1983;Dumontaux and Pop, 2013), and, Lang and Stulz (1992), who show that on average, bankruptcy announcements decrease the value of the firm's competitors and this effect is stronger for firms more highly correlated with the bankrupt firm. More broadly, this paper is also related to the literature on the pricing of risk and bad news in financial markets see e.g.…”

“…In the context of financial contagion, Iyer and Peydro (2011) find that it is higher for banks with larger interbank exposure to the failing bank, as well as for those with weaker fundamentals. Dumontaux and Pop (2013) study the stock market reaction to Lehman's failure, and find that the biggest firms, those that hold crucial positions in the system, were most affected by Lehman's demise. Similar to this paper, Gasbarro, Le, Schwebach, and Zumwalt (2004) investigate stock market reactions to syndicated loan announcements.…”