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Fluctuating attention and financial contagion

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  • Hasler, Michael
  • Ornthanalai, Chayawat

Abstract

Financial contagion occurs when return and volatility transmit between fundamentally unrelated sectors. Our equilibrium model shows that contagion arises because investors pay fluctuating attention to news. As a negative shock hits one sector, investors pay more attention to it. This raises the volatility of equilibrium discount rates resulting in simultaneous spikes in cross-sector correlations and volatilities. We test the economic mechanism of the model on fundamentally unrelated U.S. industries, which are identified using their customer-supplier relationships. Consistent with the model’s predictions, empirical evidence shows that fluctuating attention generates return and volatility spillovers between fundamentally unrelated industries.

Suggested Citation

  • Hasler, Michael & Ornthanalai, Chayawat, 2018. "Fluctuating attention and financial contagion," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 106-123.
  • Handle: RePEc:eee:moneco:v:99:y:2018:i:c:p:106-123
    DOI: 10.1016/j.jmoneco.2018.07.002
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    References listed on IDEAS

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    Cited by:

    1. Apergis, Nicholas & Christou, Christina & Kynigakis, Iason, 2019. "Contagion across US and European financial markets: Evidence from the CDS markets," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 1-12.
    2. Luo, Jiawen & Wang, Shengquan, 2019. "The asymmetric high-frequency volatility transmission across international stock markets," Finance Research Letters, Elsevier, vol. 31(C), pages 104-109.

    More about this item

    Keywords

    Learning; Attention to news; Contagion; Return and volatility spillovers;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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