Financial Firm Bankruptcy and Contagion

66 Pages Posted: 26 Aug 2012 Last revised: 19 Jun 2013

See all articles by Jean Helwege

Jean Helwege

UC Riverside

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: May 28, 2013


The Lehman bankruptcy highlights the potential for interconnectedness to cause negative externalities through counterparty contagion, but the externalities may also arise from information contagion. We examine contagion from troubled financial firms and find that counterparty contagion is greater during recessions and in cases of riskier firms and larger and more complex exposures. However, the counterparty exposures are small, especially among banks that face diversification regulations, and do not typically cause a cascade of failures. Information contagion is stronger for rivals in the same locale or the same line of business and is stronger in cases of distress than in bankruptcies.

Keywords: Banks, counterparty contagion, information contagion, bankruptcy

JEL Classification: G21, G24, G28, G32, G33, E44, E58, E61

Suggested Citation

Helwege, Jean and Zhang, Gaiyan, Financial Firm Bankruptcy and Contagion (May 28, 2013). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: or

Jean Helwege

UC Riverside ( email )

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Gaiyan Zhang (Contact Author)

University of Missouri at St. Louis - College of Business Administration ( email )

One University Blvd
St. Louis, MO 63121
United States

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