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The 2007–2009 financial crisis: changing market dynamics and the impact of credit supply and aggregate demand sensitivity

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Abstract:

This article singles out the determinants of changes in US firms’ systematic risk and idiosyncratic return induced by the 2007–2009 financial crisis. After establishing that systematic risk changes during the crisis, the results show that higher operational and financial leverage coincide with an increase in systematic risk, while high cash availability is associated with a decrease in systematic risk. The crisis-induced idiosyncratic return worsens with increasing financial leverage, higher sensitivity to aggregate demand shocks and banking sector problems, and lower operational leverage. Additional results show that the aforementioned variables have economically large effects on firm performance during the crisis.

Keywords: G01; G12; G32; aggregate demand; credit supply; financial crisis; portfolio management; time-varying systematic risk

Document Type: Research Article

DOI: https://doi.org/10.1080/00036846.2013.859379

Affiliations: 1: Luxembourg School of Finance, University of Luxembourg, 4 Rue Albert Bourschette, L-1246, Luxembourg, Luxembourg 2: De Nederlandsche Bank, Economics and Research Division, P.O. Box 98, 1000 AB Amsterdam, The Netherlands

Publication date: 2014-03-14

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