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Information Contagion and Systemic Risk

Author

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  • Toni Ahnertand
  • Co-Pierre Georg

Abstract

We examine the effect of ex-post information contagion on the ex-ante optimal portfolio choices of banks and the welfare losses due to joint default. Because of counterparty risk and common exposures, bad news about one bank reveals valuable information about another bank, thereby triggering information contagion. Systemic risk is defined as the ex-ante probability of joint bank default ex post. We find that information contagion increases systemic risk when banks are subject to common exposures since portfolio adjustments are small. In contrast, when banks are subject to counterparty risk, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.

Suggested Citation

  • Toni Ahnertand & Co-Pierre Georg, 2017. "Information Contagion and Systemic Risk," Working Papers 686, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:686
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    File URL: https://www.econrsa.org/node/1388
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    Cited by:

    1. Kiewiet, Gera & van Lelyveld, Iman Paul Pieter & van Wijnbergen, Sweder, 2017. "Contingent Convertibles: Can the Market handle them?," CEPR Discussion Papers 12359, C.E.P.R. Discussion Papers.
    2. 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

    information contagion; counterparty risk; common exposure; systemic risk;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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