Financial Fragility, Systemic Risks and Informational Spillovers: Modelling Banking Contagion as State-Contingent Change in Cross-Bank Correlation

Ashwin Moheeput

No 269851, Economic Research Papers from University of Warwick - Department of Economics

Abstract: We consider banking panic transmission in a two-bank setting, in which the main propagator of a shock across banks is the informational spillover channel. Banks are perceived to be positively connected to some unobserved macroeconomic fundamental. Depositors in each bank are assumed to noisily observe their bankís idiosyncratic fundamental. The game takes a dynamic bayesian setting with depositors of one bank, making their decision to withdraw after observing the event in the other bank. We show that, if this public event is used for bayesian inference about the state of the common macroeconomic fundamental, then, in the equilibrium proÖle of the game, contagion and correlation both occur with positive probability, with contagion modeled as a state-contingent change in the cross-bank correlation. Such endogenous characterisation of probabilistic assessments of contagion and correlation, has the appealing feature that it enables us to distill between these two concepts as equilibrium phenomena and to assess their relative importance in a given banking panic transmission setting. We show that contagion is characterised by public informational dominance in depositors' decision set.

Keywords: Financial Economics; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 76
Date: 2008-04-21
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://ageconsearch.umn.edu/record/269851/files/twerp_853.pdf (application/pdf)
https://ageconsearch.umn.edu/record/269851/files/twerp_853.pdf?subformat=pdfa (application/pdf)

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:ags:uwarer:269851

DOI: 10.22004/ag.econ.269851

Access Statistics for this paper

More papers in Economic Research Papers from University of Warwick - Department of Economics
Bibliographic data for series maintained by AgEcon Search ().