The Uncertainty Channel of Contagion

38 Pages Posted: 20 Apr 2016

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2009

Abstract

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.

Keywords: Debt Markets, Emerging Markets, Labor Policies, Currencies and Exchange Rates

Suggested Citation

Kannan, Prakash and Koehler-Geib, Fritzi N., The Uncertainty Channel of Contagion (July 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN: https://ssrn.com/abstract=1435141

Prakash Kannan

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
(202)623-8806 (Phone)

Fritzi N. Koehler-Geib (Contact Author)

The World Bank ( email )

1818, H Street, NW
Washington, DC 20433
United States
+1(202) 458 1716 (Phone)

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