Lehman Brothers: Did Markets Know?

73 Pages Posted: 12 May 2014

See all articles by Thomas Gehrig

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Vienna Graduate School of Finance (VGSF); Systemic Risk Centre - LSE

Marlene Haas


Multiple version iconThere are 5 versions of this paper

Date Written: May 8, 2014


On September 15, 2008, Lehman Brothers Inc. announced their filing for bankruptcy. This announcement did take markets by surprise causing widespread panic and disruptions in financial systems worldwide. It has been widely argued that financial contagion has escalated the insolvency into a systemic crisis. This paper studies the reaction of Lehman's competitors and market participants to this bankruptcy announcement and its spill overs to other institutions. Specifically, we focus on transaction prices of major U.S. investment and commercial banks prior to and after the bankruptcy. By decomposing their equity bid-ask spreads, we find evidence that the bankruptcy contributed to increasing adverse selection risk as well as inventory holding risk. Moreover, we find supporting evidence that the degree of competition among market makers did decline. All three components did contribute to a significant rise in transaction costs. Interestingly, the relative contribution of each channel has remained roughly constant. In the case of Lehman's stocks the adverse selection component rises only in the last three days of trading prior to the bankruptcy filing announcement. Moreover, we find no evidence of an increase in the adverse selection component of potential bidders, from which we interpret that the market did not expect a take-over or merger. We explore the robustness of our decomposition by employing volume-synchronized probability of informed trading-measures and impact regressions on prices, quantities, and their respective innovations. In general, we find little evidence of informational contagion. Moreover, any information effects are rather short-lived. Even in periods of crisis price discovery in stock markets remains remarkably efficient.

JEL Classification: G01, G14, G21

Suggested Citation

Gehrig, Thomas and Haas, Marlene, Lehman Brothers: Did Markets Know? (May 8, 2014). Available at SSRN: https://ssrn.com/abstract=2434604 or http://dx.doi.org/10.2139/ssrn.2434604

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom

Marlene Haas (Contact Author)


No Address Available

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