The Uncertainty Channel of Contagion

Prakash Kannan and Fritzi Köhler-Geib

No 2009/219, IMF Working Papers from International Monetary Fund

Abstract: The 2007 subprime crisis in the U.S. triggered a succession of financial crises around the globe, reigniting interest in the contagion phenomenon. Not all crises, however, are contagious. This paper models a new channel of contagion where the degree of anticipation of crises, through its impact on investor uncertainty, determines the occurrence of contagion. Incidences of surprise crises lead investors to doubt the accuracy of their informationgathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crisis, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.

Keywords: WP; financial crisis; rate of return; emerging market; interest rate; surprise crisis; fund investor; investor uncertainty; initial-crises country; maximization problem; probability of a crisis; risk aversion; lag of crisis; stock market crisis; anticipated crisis; investors decision; crisis month; Stock markets; Emerging and frontier financial markets; Asset prices; Global (search for similar items in EconPapers)
Pages: 40
Date: 2009-10-01
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Citations: View citations in EconPapers (19)

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