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The Uncertainty Channel of Contagion

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  • Prakash Kannan
  • Fritzi Köhler-Geib

Abstract

The 2007 subprime crisis in the U.S. triggered a succession of financial crises around the globe, reigniting interest in the contagion phenomenon. Not all crises, however, are contagious. This paper models a new channel of contagion where the degree of anticipation of crises, through its impact on investor uncertainty, determines the occurrence of contagion. Incidences of surprise crises lead investors to doubt the accuracy of their informationgathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crisis, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/219.

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Length: 40
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/219

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Keywords: Economic models; Sovereign debt; Spillovers; Stock markets; investors; contagion; crisis country; rate of return; currency crises; financial contagion; financial crises; financial crisis; crisis countries; mutual funds; stock market crisis; foreign investors; expected value; investment decisions; crisis episode; crisis ? country; return on investment; asian financial crisis; speculative attacks; private capital; international finance; foreign investment; information asymmetry; international financial contagion; global financial crisis; marginal analysis; crisis probability;

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  1. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2003. "The unholy trinity of financial contagion," MPRA Paper 13878, University Library of Munich, Germany.
  2. Alessandro Prati & Massimo Sbracia, 2002. "Currency crises and uncertainty about fundamentals," Temi di discussione (Economic working papers) 446, Bank of Italy, Economic Research and International Relations Area.
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  10. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  11. Fernando A. Broner & R. Gaston Gelos & Carmen Reinhart, 2004. "When in peril, retrench: testing the portfolio channel of contagion," Working Paper Series 2004-28, Federal Reserve Bank of San Francisco.
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  14. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  15. Tillmann, Peter, 2004. "Disparate information and the probability of currency crises: empirical evidence," Economics Letters, Elsevier, vol. 84(1), pages 61-68, July.
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  18. Caramazza, Francesco & Ricci, Luca & Salgado, Ranil, 2004. "International financial contagion in currency crises," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 51-70, February.
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Citations

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Cited by:
  1. Luis Fernando Melo & Hernán Rincón, 2012. "Choques externos y precios de los activos en Latinoamérica antes y después de la quiebra de Lehman Brothers," Borradores de Economia 704, Banco de la Republica de Colombia.
  2. Ravi Balakrishnan & Stephan Danninger & Selim Elekdag & Irina Tytell, 2011. "The Transmission of Financial Stress from Advanced to Emerging Economies," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(0), pages 40-68, May.
  3. Kannan, Prakash, 2012. "Credit conditions and recoveries from financial crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 930-947.
  4. Veysov, Alexander, 2012. "Financial Contagion and Systemic Risk: From Theory to Applicable Macroeconomic Model," MPRA Paper 40612, University Library of Munich, Germany.
  5. Olivier J. Blanchard & Mitali Das & Hamid Faruqee, 2010. "The Initial Impact of the Crisis on Emerging Market Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
  6. Marcin Kolasa & Michal Rubaszek & Daria Taglioni, 2010. "Firms in the great global recession: The role of foreign ownership and financial dependence," National Bank of Poland Working Papers 77, National Bank of Poland, Economic Institute.
  7. Prakash Kannan, 2010. "Credit Conditions and Recoveries From Recessions Associated with Financial Crises," IMF Working Papers 10/83, International Monetary Fund.
  8. Ari Aisen & Ignacio Badilla F. & Felipe Jaque S. & David Moreno S., 2010. "Crisis en la Zona Euro: Fundamentos tras el Reciente Aumento de Spreads Soberanos," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(1), pages 83-93, April.

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