Economics and Finance Faculty Publications and Presentations

Document Type

Article

Publication Date

2011

Abstract

The Emergency Economic Stabilization Act of 2008 was the response of the Federal government to the economic crisis of 2007-2009. Within this act, the Troubled Asset Relief Program (TARP) was the mechanism to attempt to stabilize the financial market through the injection of liquidity into troubled firms. This paper examines the effect of TARP bailouts on stock market volatility and investor fear. Using an event study methodology, we find evidence of a significant decrease in stock-market volatility on the day of bailouts, and the day after. Additionally, findings show that the VIX, a proxy of investor fear, significantly declines on the second day subsequent to bailouts. The results suggest that government intervention, in the form of bailouts, is successful in stabilizing financial markets and reducing investor anxiety in the short-run.

Comments

© 2011, Banking and Finance Review

Publication Title

Banking and Finance Review

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