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A wake-up call: information contagion and strategic uncertainty

  • Ahnert, Toni

    ()

    (Bank of Canada)

  • Bertsch, Christoph

    ()

    (Monetary Policy Department, Central Bank of Sweden)

A financial crisis in one region is a wake-up call for investors in other regions. If the correlation across regional fundamentals is potentially positive but uncertain ex-ante, investors acquire information about this correlation to determine their exposure. Financial contagion can occur in the absence of ex-post exposure, due to elevated strategic uncertainty among informed investors. This novel wake-up call theory of contagion explains how currency crises, bank runs, and debt crises spread across regions without a common investor base, ex-post correlated fundamentals or interconnectedness. Our wake-up call theory generates testable implications for laboratory experiments and new empirical predictions.

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File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2013/rap_wp282_revised_140327.pdf
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 282.

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Length: 79 pages
Date of creation: 01 Oct 2013
Date of revision: 01 Mar 2014
Handle: RePEc:hhs:rbnkwp:0282
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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