A Wake-Up Call: Information Contagion and Strategic Uncertainty

Ahnert, Toni; Bertsch, Christoph

doi:10.2139/ssrn.2364405

Cited by 8 publications

(14 citation statements)

References 64 publications

(62 reference statements)

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“…The key feature of this contagion channel relative to others is that the affected countries need not be interconnected through bank linkages or trade linkages; the channel is simply a revaluation of risk by investors. While the original Goldstein hypothesis was formulated outside a formal model, an active but surprisingly small theoretical literature formalizes the concept, focusing on either debt markets (Basu ()) or currency markets (Ahnert and Bertsch ()). While the Goldstein hypothesis does not take a stand on whether investors are rational or irrational, both models formalize the wake‐up hypothesis in a learning framework with rational speculators who have imperfect information about country fundamentals.…”

Section: Empirical Frameworkmentioning

confidence: 99%

“…However, while the updated beliefs lead to higher risk premiums for all countries within the risk group, some countries may escape contagion if they have strong enough local fundamentals. Ahnert and Bertsch () study contagion in a global game of speculative currency attacks under incomplete information. Here a successful attack also acts as a wake‐up call to investors, inducing them to acquire costly information about their exposure to the country attacked.…”

Section: Empirical Frameworkmentioning

confidence: 99%

See 1 more Smart Citation

The Global Crisis and Equity Market Contagion

Bekaert¹,

Ehrmann²,

Fratzscher³

et al. 2014

The Journal of Finance

569

179

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the U.S. and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries' economic fundamentals. This confirms the "wake-up call" hypothesis, with markets focusing more on country-specific characteristics during the crisis. Terms of use: Documents in EconStor may JEL No.: F3, G14, G15Keywords: contagion; financial crisis; equity markets; global transmission; market integration; country risk; factor model; financial policies; FX reserves, current account (Paris, 2012), Q-Group, (Tampa, 2012), and at the EMG-ESRC Workshop on Global Linkages and Financial Crises (Cass Business School, London, 2012) for comments on earlier versions of the paper, as well as Assaf Shtauber and Tadios Tewolde for helpful research assistance. Detailed comments from two anonymous referees and the acting editor (Bernard Dumas) also greatly improved the paper. The views expressed in this paper are solely our own and do not necessarily reflect those of the European Central Bank or the Bank of Canada. 1Ever since the seminal work of King and Wadhwani (1990) following the global October 1987 stock market crash, the international finance literature has studied how shocks are transmitted across borders.Words with negative connotations such as "volatility spillovers" (e.g., Engle, Ito and Lin (1990);Masulis, Hamao and Ng (1990)) and "contagion" have been coined to indicate shock transmission that cannot be explained by fundamentals or co-movements that are viewed as "excessive." Countless papers have been written proposing quantitative measures of contagion (see Karolyi (2003); Dungey et al. (2004), for surveys) or developing theories to explain it (e.g., Allen and Gale (2000)).The financial crisis of 2007 to 2009 has arguably been the first truly major global crisis since the Great Depression of 1929 to 1932. While the crisis initially had its origin in the United States in a relatively small segment of the lending market, the sub-prime mortgage market, it rapidly spread across virtually all economies, both advanced and emerging, as well as across economic sectors. It also affected equity markets worldwide, with many countries experi...

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Section: Empirical Frameworkmentioning

confidence: 99%

Section: Empirical Frameworkmentioning

confidence: 99%

The Global Crisis and Equity Market Contagion

Bekaert¹,

Ehrmann²,

Fratzscher³

et al. 2014

The Journal of Finance

569

179

View full text Add to dashboard Cite

show abstract

“…Our study fills this research gap by investigating the drivers of the stock markets' co-movements during the global financial crisis and non-crisis periods among three country pairs (advanced-advanced, emergingemerging, and mixed). We use Goldstein's (1998) "wake-up call" hypothesis and the theoretical work of Ahnert and Bertsch (2013) as the basis for our analysis. King and Wadhwani (1990) argue that due to incomplete information, market participants can be uncertain about the relevance of a financial crisis in one country for the fundamentals of another country.…”

Section: Introductionmentioning

confidence: 99%

“…Goldstein (1998, p. 18) clearly explains a wake-up call as: "I refer to it as a wake-up call because to judge from most market indicators of risk, private creditors and rating agencies were asleep prior to the outbreak of the crisis. " Ahnert and Bertsch (2013) show in their theoretical model that contagion occurs even if investors learn later that the fundamentals have no correlation ex post and that common links do not exist.…”

Section: Introductionmentioning

confidence: 99%

Determinants of time varying co-movements among international stock markets during crisis and non-crisis periods

Mobarek

Muradoğlu

Mollah

et al. 2016

Journal of Financial Stability

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“… Other theoretical papers that study financial contagion in a global games context are Manz (), Oh (), and Ahnert and Bertsch (). …”

mentioning

confidence: 99%

Informational Channels of Financial Contagion

Trevino

2020

ECTA

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Two main classes of channels are studied as informational sources of financial contagion. One is a fundamental channel that is based on real and financial links between economies, and the second is a social learning channel that arises when agents base their decisions on noisy observations about the actions of others in foreign markets. Using global games, I present a two-country model of financial contagion in which both channels can operate and I test its predictions experimentally. The experimental results show that subjects do not extract information optimally, which leads to two systematic biases that affect these channels directly. Base-rate neglect leads subjects to underweight their prior, and thus weakens the fundamental channel. An overreaction bias strengthens the social learning channel, since subjects rely on information about the behavior of others, even when this information is irrelevant. These results have significant welfare effects rooted in the specific way in which these biases alter behavior.

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A Wake-Up Call: Information Contagion and Strategic Uncertainty

Cited by 8 publications

References 64 publications

The Global Crisis and Equity Market Contagion

The Global Crisis and Equity Market Contagion

Determinants of time varying co-movements among international stock markets during crisis and non-crisis periods

Informational Channels of Financial Contagion

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