A Wake-Up Call Theory of Contagion

72 Pages Posted: 4 May 2022

See all articles by Toni Ahnert

Toni Ahnert

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

Christoph Bertsch

Sveriges Riksbank - Research Division

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2022

Abstract

We offer a theory of financial contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex-post exposure to region 1. We explore normative and testable implications of the model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work.

Keywords: bank run, contagion, financial crises, fundamental re-assessment., global games, information choice, wake-up call

JEL Classification: D83, F3, G01, G21

Suggested Citation

Ahnert, Toni and Bertsch, Christoph, A Wake-Up Call Theory of Contagion (May 1, 2022). ECB Working Paper No. 2022/2658, Available at SSRN: https://ssrn.com/abstract=4100188 or http://dx.doi.org/10.2139/ssrn.4100188

Toni Ahnert (Contact Author)

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

Christoph Bertsch

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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