Further Evidence on Equity Market Contagion: The Fslic's Solvency and the Liquidity Crisis of Financial Corporation of America
Posted: 3 Nov 1998
Whether pure contagion is more likely to occur when a federal deposit insurer is severely undercapitalized is an unanswered question. This paper provides evidence on this issue by examining the stock market reaction of savings and loans (S&Ls) to the crisis of Financial Corporation of America (FCA) in 1984, when the Federal Savings and Loan Insurance Corporation was fiscally unsound. Consistent with a contingent insurance guarantee hypothesis, the results show large, significant negative abnormal returns (ARs) for a portfolio of high insured deposit S&Ls during FCA's crisis.
JEL Classification: F31, G21, G28
Suggested Citation: Suggested Citation