Information Contagion and Systemic Risk

Toni Ahnert and Co-Pierre Georg

Staff Working Papers from Bank of Canada

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

Keywords: Financial Institutions; Financial stability (search for similar items in EconPapers)
JEL-codes: G01 G11 G21 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Information contagion and systemic risk (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-29

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