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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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    References listed on IDEAS

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    Cited by:

    1. Cabrales, Antonio; Gale, Douglas; Gottardi, Piero, 2015. "Financial Contagion in Networks," Economics Working Papers ECO2015/01, European University Institute.
    2. Gera Kiewiet & Iman van Lelyveld & Sweder van Wijnbergen, 2017. "Contingent Convertibles: Can the Market Handle them?," Tinbergen Institute Discussion Papers 17-095/VI, Tinbergen Institute.
    3. Martin Brown & Stefan Trautmann & Razvan Vlahu, 2012. "Contagious Bank Runs: Experimental Evidence," DNB Working Papers 363, Netherlands Central Bank, Research Department.
    4. Stephanie Chan & Sweder van Wijnbergen, 2014. "Cocos, Contagion and Systemic Risk," Tinbergen Institute Discussion Papers 14-110/VI/DSF79, Tinbergen Institute, revised 29 Oct 2014.
    5. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2014. "Understanding bank-run contagion," Working Paper Series 1711, European Central Bank.
    6. Jokivuolle, Esa & Tunaru, Radu & Vioto, Davide, 2018. "Testing the systemic risk differences in banks," Research Discussion Papers 13/2018, Bank of Finland.

    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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