Dynamics in the correlations of the Credit Default Swaps’ G14 dealers: Are there any contagion effects due to Lehman Brothers’ bankruptcy and the global financial crisis?

This article investigates the dynamics of conditional correlation among the G14 banks’ dealer for the credit default swap market from January 2004 until May 2009. By using the asymmetric dynamic conditional correlation model developed by Cappiello, Engle and Sheppard (2006), we examine if there is contagion during the global financial crisis, following Lehman Brothers’ bankruptcy of September 15th, 2008. The main contribution of this article is to analyze if the interdependence structure between the G14 banks changed significantly during the crisis period. We try to identify the banks which were the most or the least affected by losses induced by the crisis and we draw some conclusions in terms of their vulnerability to financial shocks. We find that all banks became highly interdependent during Lehman Brothers’ bankruptcy (short term impact), but only some banks faced high contagion during the global financial crisis (long term impact). Regulators who try to reinforce banks’ stability with the Basel 3 reforms proposals should be interested by these results.