Investing against the wind: contagion during the recent financial crisis

ABSTRACT

This article examines the effect of Warren Buffett’s investment in Goldman Sachs on 24 September 2008, during the subprime mortgage crisis. Although this event is arguably perceived to be the biggest expression of confidence in the financial market during the crisis, by conducting event studies, we do not find the major counterparties of Goldman Sachs displayed positive abnormal returns. Moreover, the abnormal return is not significantly related to the counterparty connection. We have similar findings on these financial institutions’ default probabilities using credit default swap.

KEYWORDS:

• Financial contagion
• event studies
• financial crisis
• abnormal return

JEL CLASSIFICATIONS:

• G14
• G20

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Erratum

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For details, please see http://www.wsj.com/articles/SB122220798359168765

² Please see Allen and Gale (2000) and Chen (1999) for theories on financial contagion.

³ For details, please see http://fcic.law.stanford.edu/report