The Uncertainty Channel of Contagion
October 1, 2009
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Summary
The 2007 subprime crisis in the U.S. triggered a succession of financial crises around the globe, reigniting interest in the contagion phenomenon. Not all crises, however, are contagious. This paper models a new channel of contagion where the degree of anticipation of crises, through its impact on investor uncertainty, determines the occurrence of contagion. Incidences of surprise crises lead investors to doubt the accuracy of their informationgathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crisis, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.
Subject: Asset prices, Emerging and frontier financial markets, Financial crises, Financial markets, Prices, Stock markets, Technology
Keywords: anticipated crisis, Asset prices, crisis month, Emerging and frontier financial markets, emerging market, financial crisis, fund investor, Global, initial-crises country, interest rate, investor uncertainty, investors decision, lag of crisis, maximization problem, probability of a crisis, rate of return, risk aversion, stock market crisis, Stock markets, surprise crisis, WP
Pages:
40
Volume:
2009
DOI:
Issue:
219
Series:
Working Paper No. 2009/219
Stock No:
WPIEA2009219
ISBN:
9781451873665
ISSN:
1018-5941
