Contagious Runs: Who Initiates?

11 Pages Posted: 31 Jan 2016

See all articles by Dong Beom Choi

Dong Beom Choi

Seoul National University - Business School

Date Written: January 28, 2016

Abstract

This paper presents a model of contagious panic between two regions with heterogeneous fragilities. When there is no strategic risk, the spillover is always one-directional; the contagion can only originate from the fundamentally weaker region spilling over to the stronger. When strategic risks due to strategic complementarities cause a self-fullling panic, the direction of the contagion could be reversed; panic in the stronger region could generate a contagious panic in the weaker. We show that this depends on the difference in severity of coordination problems between the two regions and the scale of potential spillovers.

Keywords: Contagion, Self-fulfilling panic, Global games, Network

JEL Classification: D84, D85, G01

Suggested Citation

Choi, Dong Beom, Contagious Runs: Who Initiates? (January 28, 2016). Available at SSRN: https://ssrn.com/abstract=2724065 or http://dx.doi.org/10.2139/ssrn.2724065

Dong Beom Choi (Contact Author)

Seoul National University - Business School ( email )

Seoul
Korea, Republic of (South Korea)

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