Market Microstructure in Emerging and Developed Markets

CHAPTER 7

Financial Market Contagion

THADAVILLIL JITHENDRANATHAN

Professor of Finance, Opus College of Business, University of St. Thomas

INTRODUCTION

The watershed moment in the financial crisis of 2008–2009 was the bankruptcy filing by Lehman Brothers on September 15, 2008. Despite efforts by the Federal Reserve Bank, none of the other major financial institutions came forward to acquire the troubled investment bank. Announcing the bankruptcy filing of a major investment bank in the United States had a substantial negative impact on the S&P 500 index, which fell by 4.7 percent, and the other world stock market indexes also suffered large losses. In the following days, Barclays and Nomura Holdings acquired a major part of the assets of Lehman Brothers. The week of September 15 was also tumultuous for U.S. stock markets and others around the world. On September 16, the S&P 500 index rallied to a gain of 1.75 percent but fell by 4.71 percent the next day. Hope of an orderly disposal of assets of Lehman Brothers boosted the markets for the next two days: The S&P 500 index rose by around 8.9 percent, and most of the other markets around the world reflected these gains.

The respite from the collapse of Lehman Brothers was short-lived. The financial crisis, which had its origins in the housing market collapse, spread to other financial institutions and resulted in one of the worst economic crises since the Great Depression. Six months from September 19, 2008, the S&P 500 index fell ...