Working Paper: CEPR ID: DP16809
Authors: Toni Ahnert; Christoph Bertsch
Abstract: We offer a theory of financial contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions linked by an initially unobserved macro shock. A crisis in region 1 is a wake-upcall to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex-post exposure to region 1. We explore normative and testable implications ofthe model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work.
Keywords: wakeup call; information choice; financial crises; contagion; bank run; global games; fundamental reassessment
JEL Codes: D83; F3; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Crisis in region 1 (H12) | Reassessment of fundamentals in region 2 (R50) |
| Crisis in region 1 (H12) | Probability of crisis in region 2 (H12) |
| Reassessment of fundamentals in region 2 (R50) | Probability of crisis in region 2 (H12) |
| Crisis in region 1 (H12) | Information acquisition by investors in region 2 (G24) |
| Ex ante exposure across regions (R12) | Strength of contagion (F65) |