Credit Contagion from Counterparty Risk

Jorion, Philippe; Zhang, Gaiyan

doi:10.2139/ssrn.1396733

Cited by 114 publications

(100 citation statements)

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“…There are a few notable exceptions, however. Jorion and Zhang (2009) conduct a systematic test of counterparty contagion effects using bankruptcy court filing documents to identify the top 20 unsecured creditors, and find that counterparty risk is important in explaining contagion. However, their bankruptcy sample covers mostly industrial firms, because the bankruptcy of US financial institutions has been fairly infrequent until recently.…”

Section: Related Literature and Hypotheses Developmentmentioning

confidence: 99%

“…In studying the effects of a firm's bankruptcy on the CDS spreads of its industry competitors, Jorion and Zhang (2007) use one CDS spread quote per day for a large sample of industry peer firms. In their subsequent study of counterparty risk, Jorion and Zhang (2009) examine CDS spread changes of creditors of bankrupt firms.…”

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confidence: 99%

“…5 Some recent studies discussing various dimensions of the crisis triggered by Lehman include Ivashina and Scharfstein (2010), Fernando, May, andMegginson (2011), Jorion andZhang (2011) and Aragon and Strahan (2010). contagion have examined smaller firms with limited interconnectedness. Of note is Jorion and Zhang (2009) who focus on mostly industrial firms and a small group of financial institutions that went bankrupt, with their sample period ending before 2005. 6 However, the counterparty effect could be more significant if the failed firm is a large financial firm and its counterparty relationships are complex.…”

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Credit Contagion Channels: Market Microstructure Evidence from Lehman Brothers’ Bankruptcy

Chakrabarty

Zhang

2012

Financial Management

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Immediately after Lehman Brothers’ bankruptcy, many firms disclosed their financial exposure (or lack thereof) to Lehman. This offers a clean setting to test two credit contagion channels through which a financial firm's bankruptcy can affect other firms—“counterparty risk” and “information transmission” channels. Using market microstructure variables to measure the various dimensions of contagion effects, we provide robust evidence supporting the significance of counterparty risk. Firms with exposure to Lehman suffered more severe negative effects—wider bid‐ask spread, higher price impact, greater information asymmetry, and greater selling pressure—than unexposed firms. We find mixed evidence regarding the information transmission hypothesis.

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Section: Related Literature and Hypotheses Developmentmentioning

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Credit Contagion Channels: Market Microstructure Evidence from Lehman Brothers’ Bankruptcy

Chakrabarty

Zhang

2012

Financial Management

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“…Another closely related paper is that by Jorion and Zhang (2009). They made use of a sample of around 250 U.S. corporate bankruptcies and the subset of the associated, unsecured creditors holding the largest claims on the bankrupt debtors.…”

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confidence: 99%

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We quantify the importance of trade credit chains for the propagation of corporate bankruptcies. Our results show that trade creditors (suppliers) that issue more trade credit are more exposed to trade debtor (customer) failures, both in terms of the likelihood of experiencing a debtor failure and the loss given failure. We further document that the credit loss invoked by a debtor failure imposes a substantially enhanced bankruptcy risk on the creditors. The propagation mechanism is mitigated for creditors that are less levered, cash rich, and highly pro…table, and enhanced in R&D intense industries and during economic downturns. Terms of use: Documents inKeywords: Trade credit; Credit chains; Bankruptcy; Contagion JEL: G30; G33 Discussions with and suggestions from Roc Armenter, Mikael Carlsson, Satyajit Chatterjee, Hans Degryse, Reint Gropp, Thomas Jansson, Nobu Kiyotaki, Judit Montoriol-Garriga, Leonard Nakamura, Steven Ongena, Fabiana Penas, Gregory Udell and Jason Wei have been very helpful in improving upon earlier drafts. We are also grateful for comments from seminar participants at Sveriges Riksbank. We are indebted to Tommy von Brömsen for providing outstanding research assistance. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as re ‡ecting the views of the Executive Board of Sveriges Riksbank.y Research Division, Sveriges Riksbank.

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“…See for instanceDas et al (2007) for evidence of excess default correlation, andJorion and Zhang (2009) for an analysis of contagion effects due to counterparty risk. C 2009 Blackwell Publishing Ltd…”

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Risk Management Lessons from the Credit Crisis

Jorion¹

2009

Euro Fin Management

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118

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Risk management, even if flawlessly executed, does not guarantee that big losses will not occur. Big losses can occur because of business decisions and bad luck. Even so, the events of 2007 and 2008 have highlighted serious deficiencies in risk models. For some firms, risk models failed because of known unknowns. These include model risk, liquidity risk, and counterparty risk. In 2008, risk models largely failed due to unknown unknowns, which include regulatory and structural changes in capital markets. Risk management systems need to be improved and place a greater emphasis on stress tests and scenario analysis. In practice, this can only be based on position-based risk measures that are the basis for modern risk measurement architecture. Overall, this crisis has reinforced the importance of risk management.

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Credit Contagion from Counterparty Risk

Cited by 114 publications

References 23 publications

Credit Contagion Channels: Market Microstructure Evidence from Lehman Brothers’ Bankruptcy

Credit Contagion Channels: Market Microstructure Evidence from Lehman Brothers’ Bankruptcy

Trade Credit and the Propagation of Corporate Failure: An Empirical Analysis

Risk Management Lessons from the Credit Crisis

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