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A wake-up call: information contagion and strategic uncertainty

Author

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  • 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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    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. 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.
    3. Isabel Trevino, 2020. "Informational Channels of Financial Contagion," Econometrica, Econometric Society, vol. 88(1), pages 297-335, January.
    4. Lee, Seohyun, 2017. "Three essays on uncertainty: real and financial effects of uncertainty shocks," MPRA Paper 83617, University Library of Munich, Germany.
    5. Cong, Lin William & Grenadier, Steven R. & Hu, Yunzhi, 2020. "Dynamic interventions and informational linkages," Journal of Financial Economics, Elsevier, vol. 135(1), pages 1-15.
    6. Ji, Qiang & Liu, Bing-Yue & Cunado, Juncal & Gupta, Rangan, 2020. "Risk spillover between the US and the remaining G7 stock markets using time-varying copulas with Markov switching: Evidence from over a century of data," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    7. Cabrales, Antonio; Gale, Douglas; Gottardi, Piero, 2015. "Financial Contagion in Networks," Economics Working Papers ECO2015/01, European University Institute.
    8. Ana-Maria Fuertes & Maria-Dolores Robles, 2021. "Bank Credit Risk Events and Peers’ Equity Value," Documentos de Trabajo del ICAE 2021-06, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    9. Kubitza, Christian & Gründl, Helmut, 2016. "Systemic risk: Time-lags and persistence," ICIR Working Paper Series 20/16, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    10. 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.
    11. Audzeyeva, Alena & Fuertes, Ana-Maria, 2018. "On the predictability of emerging market sovereign credit spreads," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 140-157.
    12. Suren Vardanyan, 2016. "Contagion in Experimental Financial Markets," CERGE-EI Working Papers wp580, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    13. Vorstaz, Marc & Lopes Moreira Da Veiga, María Helena & Peeters, Ronald, 2020. "Contagion in sequential financial markets: an experimental analysis," DES - Working Papers. Statistics and Econometrics. WS 31230, Universidad Carlos III de Madrid. Departamento de Estadística.
    14. Rho, Caterina & Saenz, Manrique, 2021. "Financial stress and the probability of sovereign default," Journal of International Money and Finance, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    contagion; information acquisition; wake-up call; mixture distribution;
    All these keywords.

    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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