Information Contagion and Systemic Risk

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

Toni Ahnert

Government of Canada - Bank of Canada

Co-Pierre Georg

Deutsche Bundesbank; University of Cape Town (UCT)

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

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
+1 613 782 8765 (Phone)

Co-Pierre Georg (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, 7701
South Africa

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