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The uncertainty channel of contagion

  • Kannan, Prakash
  • Kohler-Geib, Fritzi

The 2007 subprime crisis in the United States has triggered a succession of financial crises around the globe, reigniting interest in the contagion phenomenon. Not all crises, however, are contagious. This paper models a new channel of contagion where the degree of anticipation of crises, through its impact on investor uncertainty, determines the occurrence of contagion. Incidences of surprise crises lead investors to doubt the accuracy of their information-gathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crises, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4995.

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Date of creation: 01 Jul 2009
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Handle: RePEc:wbk:wbrwps:4995
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