The Uncertainty Channel of Contagion

Author/Editor:

Prakash Kannan ; Fritzi Köhler-Geib

Publication Date:

October 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 09/219

Subject:

English

Publication Date:

October 1, 2009

ISBN/ISSN:

9781451873665/1018-5941

Stock No:

WPIEA2009219

Format:

Paper

Pages:

40

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