Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 282: A wake-up call: information contagion and strategic uncertainty
Toni Ahnert () and Christoph Bertsch ()
Additional contact information
Toni Ahnert: Bank of Canada, Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Christoph Bertsch: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, 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.
Keywords: contagion; information acquisition; wake-up call; mixture distribution
79 pages, First version: October 1, 2013. Revised: March 1, 2014.
Full text files
rap_wp282_revised_140327.pdf
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