Abstract

http://ssrn.com/abstract=940634
 
 

Citations



 


 



Information Contagion and Bank Herding


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for International Finance and Regulation (CIFR); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Tanju Yorulmazer


Federal Reserve Bank of New York


Journal of Money, Credit, and Banking, Forthcoming

Abstract:     
We show that the likelihood of information contagion induces profit-maximizing bank owners to herd with other banks. When bank loan returns have a common systematic factor, the cost of borrowing for a bank increases when there is adverse news on other banks, since such news, in turn, conveys adverse information about the common factor. The increase in a bank's cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality (in addition to the systematic risk factor). Hence, banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing. Competitive effects such as superior margins from lending in different industries mitigate herding incentives.

Keywords: Systemic risk, Information spillover, Inter-bank correlation

JEL Classification: G21, G28, G38, E58, D62

Accepted Paper Series


Not Available For Download

Date posted: October 28, 2006  

Suggested Citation

Acharya, Viral V. and Yorulmazer, Tanju, Information Contagion and Bank Herding. Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: http://ssrn.com/abstract=940634

Contact Information

Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for International Finance and Regulation (CIFR) ( email )
Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Tanju Yorulmazer
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://www.ny.frb.org/research/economists/yorulmazer/index.html
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