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The uncertainty channel of contagion

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  • Kannan, Prakash
  • Kohler-Geib, Fritzi

Abstract

The 2007 subprime crisis in the United States has 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 information-gathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crises, 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 The World Bank in its series Policy Research Working Paper Series with number 4995.

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Date of creation: 01 Jul 2009
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Handle: RePEc:wbk:wbrwps:4995

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Keywords: Debt Markets; Emerging Markets; Labor Policies; Currencies and Exchange Rates;

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  8. Jordi Mondria, 2006. "Financial Contagion and Attention Allocation," 2006 Meeting Papers 177, Society for Economic Dynamics.
  9. Christina E. Bannier, 2006. "The Role of Information Disclosure and Uncertainty in the 1994/95 Mexican Peso Crisis: Empirical Evidence," Review of International Economics, Wiley Blackwell, vol. 14(5), pages 883-909, November.
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  16. Tillmann, Peter, 2004. "Disparate information and the probability of currency crises: empirical evidence," Economics Letters, Elsevier, vol. 84(1), pages 61-68, July.
  17. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  18. Paolo Mauro & Tatiana Didier & Sergio L. Schmukler, 2006. "Vanishing Contagion?," IMF Policy Discussion Papers 06/01, International Monetary Fund.
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Citations

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Cited by:
  1. Veysov, Alexander, 2012. "Financial Contagion and Systemic Risk: From Theory to Applicable Macroeconomic Model," MPRA Paper 40612, University Library of Munich, Germany.
  2. 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.
  3. 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.
  4. Prakash Kannan, 2010. "Credit Conditions and Recoveries From Recessions Associated with Financial Crises," IMF Working Papers 10/83, International Monetary Fund.
  5. 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.
  6. 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.
  7. Kannan, Prakash, 2012. "Credit conditions and recoveries from financial crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 930-947.
  8. 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.

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