Economics at your fingertips  

Fluctuating attention and financial contagion

Michael Hasler and Chayawat Ornthanalai

Journal of Monetary Economics, 2018, vol. 99, issue C, 106-123

Abstract: Financial contagion occurs when return and volatility transmit between fundamentally unrelated sectors. Our equilibrium model shows that contagion arises because investors pay fluctuating attention to news. As a negative shock hits one sector, investors pay more attention to it. This raises the volatility of equilibrium discount rates resulting in simultaneous spikes in cross-sector correlations and volatilities. We test the economic mechanism of the model on fundamentally unrelated U.S. industries, which are identified using their customer-supplier relationships. Consistent with the model’s predictions, empirical evidence shows that fluctuating attention generates return and volatility spillovers between fundamentally unrelated industries.

Keywords: Learning; Attention to news; Contagion; Return and volatility spillovers (search for similar items in EconPapers)
JEL-codes: D51 G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-01-19
Handle: RePEc:eee:moneco:v:99:y:2018:i:c:p:106-123