The Uncertainty Channel of Contagion

41 Pages Posted: 13 Oct 2009

Multiple version iconThere are 2 versions of this paper

Date Written: October 2009

Abstract

The 2007 subprime crisis in the U.S. 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 informationgathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crisis, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.

Keywords: Capital markets, Cross country analysis, Currencies, Economic models, Financial crisis, Investment, Sovereign debt, Spillovers, Stock markets

Suggested Citation

Kannan, Prakash and Koehler-Geib, Fritzi N., The Uncertainty Channel of Contagion (October 2009). IMF Working Papers, Vol. , pp. 1-40, 2009. Available at SSRN: https://ssrn.com/abstract=1486537

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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