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Information Contagion and Systemic Risk

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  • Toni Ahnert
  • Co-Pierre Georg

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

  • Toni Ahnert & Co-Pierre Georg, 2017. "Information Contagion and Systemic Risk," Staff Working Papers 17-29, Bank of Canada.
    • Handle: RePEc:bca:bocawp:17-29
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    More about this item

    Keywords

    Financial Institutions; Financial stability;

    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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