A Wake-Up Call Theory of Contagion*

Asymmetric business cycles: theory and time-series evidence

Toni Ahnert and Christoph Bertsch

Review of Finance, 2022, vol. 26, issue 4, 829-854

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: Wake-up call; Information choice; Financial crises; Contagion; Bank run; Global games; Fundamental re-assessment (search for similar items in EconPapers)
JEL-codes: D83 F3 G01 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: A Wake-Up Call Theory of Contagion (2022)
Working Paper: A Wake-Up Call Theory of Contagion (2021)
Working Paper: A Wake-Up-Call Theory of Contagion (2015)
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