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A Wake-Up Call Theory of Contagion

Toni Ahnert and Christoph Bertsch ()

No 2658, Working Paper Series from European Central Bank

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. JEL Classification: D83, F3, G01, G21

Keywords: bank run; contagion; financial crises; fundamental re-assessment.; global games; information choice; wake-up call (search for similar items in EconPapers)
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-gth
Note: 848910
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Journal Article: A Wake-Up Call Theory of Contagion* (2022) Downloads
Working Paper: A Wake-Up Call Theory of Contagion (2021) Downloads
Working Paper: A Wake-Up-Call Theory of Contagion (2015) Downloads
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