Information Contagion and Systemic Risk

41 Pages Posted: 3 Jul 2015 Last revised: 4 Nov 2016

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR)

Co-Pierre Georg

EDHEC Business School

Date Written: November 1, 2016

Abstract

We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint default of banks. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank and trigger information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases systemic risk overall. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.

Keywords: Information contagion, counterparty risk, common exposure, systemic risk

JEL Classification: G01, G21

Suggested Citation

Ahnert, Toni and Georg, Co-Pierre, Information Contagion and Systemic Risk (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2625575 or http://dx.doi.org/10.2139/ssrn.2625575

Toni Ahnert

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Co-Pierre Georg (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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