A Wake-Up Call Theory of Contagion

Toni Ahnert and ,
Authors registered in the RePEc Author Service: Christoph Bertsch

No 16809, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: 2021-12
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Related works:
Journal Article: A Wake-Up Call Theory of Contagion* (2022)
Working Paper: A Wake-Up Call Theory of Contagion (2022)
Working Paper: A Wake-Up-Call Theory of Contagion (2015)
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