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A wake-up call: information contagion and strategic uncertainty

Author

Listed:
  • Ahnert, Toni

    () (Bank of Canada)

  • Bertsch, Christoph

    () (Monetary Policy Department, Central Bank of Sweden)

Abstract

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.

Suggested Citation

  • Ahnert, Toni & Bertsch, Christoph, 2013. "A wake-up call: information contagion and strategic uncertainty," Working Paper Series 282, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
  • Handle: RePEc:hhs:rbnkwp:0282
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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2013/rap_wp282_revised_140327.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Geert Bekaert & Michael Ehrmann & Marcel Fratzscher & Arnaud Mehl, 2014. "The Global Crisis and Equity Market Contagion," Journal of Finance, American Finance Association, vol. 69(6), pages 2597-2649, December.
    2. Toni Ahnert & Christoph Bertsch, 2015. "A Wake-Up-Call Theory of Contagion," Staff Working Papers 15-14, Bank of Canada.
    3. Cabrales, Antonio; Gale, Douglas; Gottardi, Piero, 2015. "Financial Contagion in Networks," Economics Working Papers ECO2015/01, European University Institute.
    4. Chun-An Li & Min-Ching Lee & Chin-Sheng Huang, 2018. "Taiwan And U.S. Equity Market Interdependence And Contagion: Evidence From Four-Factor Model," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 12(2), pages 95-115.
    5. Suren Vardanyan, 2016. "Contagion in Experimental Financial Markets," CERGE-EI Working Papers wp580, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

    More about this item

    Keywords

    contagion; information acquisition; wake-up call; mixture distribution;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G01 - Financial Economics - - General - - - Financial Crises

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