No. 282 A wake-up call: information contagion and strategic uncertainty

by Toni Ahnert and Christoph Bertsch

October 2013 (revised 27 March 2014)

Abstract:

A financial crisis in one region is a wake-up call for investors in other regions. If the correlation across regional fundamentals is potentially positive but uncertain ex-ante, investors acquire information about this correlation to determine their exposure. Financial contagion can occur in the absence of ex-post exposure, due to elevated strategic uncertainty among informed investors. This novel wake-up call theory of contagion explains how currency crises, bank runs, and debt crises spread across regions without a common investor base, ex-post correlated fundamentals or interconnectedness. Our wake-up call theory generates testable implications for laboratory experiments and new empirical predictions.

Keywords:

contagion, information acquisition, wake-up call, mixture distribution.

JEL classifications:

C70, D83, G01.