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Information contagion and systemic risk

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  • Ahnert, Toni
  • Georg, Co-Pierre

Abstract

We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint bank default. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank, triggering information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases overall systemic risk. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios, thereby reducing systemic risk.

Suggested Citation

  • Ahnert, Toni & Georg, Co-Pierre, 2018. "Information contagion and systemic risk," Journal of Financial Stability, Elsevier, vol. 35(C), pages 159-171.
    • Handle: RePEc:eee:finsta:v:35:y:2018:i:c:p:159-171
    DOI: 10.1016/j.jfs.2017.05.009
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    More about this item

    Keywords

    Information contagion; Counterparty risk; Common exposure; Portfolio choice; Interbank market;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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