AIG’s Announcements, Fed’s Innovation, Contagion and Systemic Risk in the Financial Industry
27 Pages Posted: 1 Nov 2018
Date Written: 2011
This paper aims at testing the effect of AIG’s loss announcements and Federal Reserve’s subsequent innovation on the financial industry. An analysis of seemingly unrelated regression on the returns of four industries- banking, insurance, brokerage firms and savings and loan Institutions (S&Ls) for the period September 5, 2007 to December 31, 2008 reveals that, the Federal Reserve’s announcement on September 16, 2008 and October 8, 2008 to pledge $85 billion and $37.8 billion, respectively has the most impact on the financial sector. All the four industries are also sensitive towards any shock in the short run, long run interest rate and the market return. The market experiences significant contagion and incremental systemic risk after the bailout by the Federal Reserve but we do not find any significant evidence in support of the Federal Reserve’s perception of AIG to be too-big-to-fail.
Keywords: AIG, Financial Crisis, Bailout, Too-Big-to-Fail, Contagion, Systemic Risk
JEL Classification: G21, G29
Suggested Citation: Suggested Citation