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Contagion Inside the Credit Default Swaps Markets in Light of the 2008 Crisis

2011; RELX Group (Netherlands); Linguagem: Inglês

1556-5068

Jamal Mattar, Danielle Sougné,

Insurance and Financial Risk Management

In large parts of literature, an increase in correlation coefficients of returns across countries is regarded as evidence for contagion in financial markets. This paper checks this hypothesis in the Credit Default Swaps (CDSs) markets. We construct a sample of 43 CDSs on major U.S. and European financial institutions. Then we study the effect that five financial institutions (four American and one Icelandic institution) in their role as CDS market players have on the whole CDS market as the institutions entered either into bankruptcy (Lehman Brothers, Landsbanki Bank, and Washington Mutual) or passed through trouble periods (Merrill Lynch and Bear Stearns) in 2008. We remark a contagion effect for the failure of Lehman Brothers and Landsbanki, a competition effect for Washington Mutual, a small decrease in the correlation coefficient for Merrill Lynch, and a small increase in the coefficient for Bear Stearns.