Informational Channels of Financial Contagion

Isabel Trevino

Econometrica, 2020, vol. 88, issue 1, 297-335

Abstract: Two main classes of channels are studied as informational sources of financial contagion. One is a fundamental channel that is based on real and financial links between economies, and the second is a social learning channel that arises when agents base their decisions on noisy observations about the actions of others in foreign markets. Using global games, I present a two‐country model of financial contagion in which both channels can operate and I test its predictions experimentally. The experimental results show that subjects do not extract information optimally, which leads to two systematic biases that affect these channels directly. Base‐rate neglect leads subjects to underweight their prior, and thus weakens the fundamental channel. An overreaction bias strengthens the social learning channel, since subjects rely on information about the behavior of others, even when this information is irrelevant. These results have significant welfare effects rooted in the specific way in which these biases alter behavior.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
https://doi.org/10.3982/ECTA15604

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: https://EconPapers.repec.org/RePEc:wly:emetrp:v:88:y:2020:i:1:p:297-335

Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues

Access Statistics for this article

Econometrica is currently edited by Guido W. Imbens

More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().