The Uncertainty Channel of Contagion

Prakash Kannan () and Köhler-Geib, Fritzi

No 09/219, 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: Capital markets; Cross country analysis; Currencies; Economic models; Financial crisis; Investment; Sovereign debt; Spillovers; Stock markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba
Date: 2009-10-08

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Working Paper: The uncertainty channel of contagion (2009)
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