Information-based contagion and the implications for financial fragility

Manz, Michael

doi:10.1016/j.euroecorev.2010.02.001

Cited by 20 publications

(7 citation statements)

References 24 publications

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“…ρ = 0) can be higher than the ex-ante likelihood of attacks when all speculators are uninformed (n = 0). 26 We call this effect contagion-through-alertness, as it arises following a successful currency attack in country 1. Learning good news about the strength of a central banks ability to defend its currency might have "detrimental" effects.…”

Section: The Novel Contagion Mechanismmentioning

confidence: 99%

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A Wake-Up Call: Information Contagion and Strategic Uncertainty

Ahnert

Bertsch

2013

SSRN Journal

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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. The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. The papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments. Abstract A successful speculative attack against one currency is a wake-up call for speculators elsewhere. Currency speculators have an incentive to acquire costly information about exposures across countries to infer whether their monetary authority's ability to defend its currency is weakened. Information acquisition per se increases the likelihood of speculative currency attacks via heightened strategic uncertainty among speculators. Contagion occurs even if speculators learn that there is no exposure. Our new contagion mechanism offers a compelling explanation for the 1997 Asian currency crisis and the 1998 Russian crisis, both of which spread across countries with seemingly unrelated fundamentals and limited interconnectedness. The proposed contagion mechanism applies generally in global coordination games and can also be applied to bank runs, sovereign debt crises, and political regime change. Terms of use: Documents in

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Section: The Novel Contagion Mechanismmentioning

confidence: 99%

“…Manz [26] explores the role of common exposures in a global-games framework. Second, financial contagion can arise from interconnectedness.…”

Section: Contagion In Financial Economicsmentioning

confidence: 99%

A Wake-Up Call: Information Contagion and Strategic Uncertainty

Ahnert

Bertsch

2013

SSRN Journal

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“…Several theories study the informational nature of contagion, where news regarding one firm reveals information about another, leading to correlated risks (see e.g., Manz, 2010 andOh, 2013). In contrast to these studies, we present a moral hazard framework in which contagion adversely affects monitoring incentives.…”

Section: Related Literaturementioning

confidence: 99%

Contagion through common borrowers

Biswas

Gómez

2018

Journal of Financial Stability

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We propose a model in which banks are exposed to the risk of contagion through their portfolio of loans. We show that a solvency problem in one bank can be transmitted to another if they lend to the same borrower. The novelty is that the channel for the transmission involves banks' monitoring incentives. The intensity with which all banks monitor a common borrower is reduced when one of the banks suffers a solvency shock. The reduced effort intensity affects the borrower's probability of success and creates a contagion (endogenous correlation) from the balance-sheet of the affected bank to the balance-sheet of the other banks lending to the same borrower. Banks hit by a solvency shock have lower incentives to monitor borrowers because less is left after paying depositors. Banks not hit by a solvency shock face borrowers' risks entirely on their own, which increases the expected cost of lending. As a consequence, they respond by reducing the monitoring intensity for the common borrower. Bank equity can mitigate the risk of contagion.

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“…Spillovers of this kind are discussed in a complementary literature where spillovers are typically modeled as sequential games. E.g., Manz (2002Manz ( , 2010 studies contagion among firms that are subject to common fundamentals. The performance of firms a↵ects other firms by altering the behavior of creditors.…”

Section: Introductionmentioning

confidence: 99%

Correlation and coordination risk

Geiger

Hule

2019

Ann Finance

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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. AbstractWe study the potential role of correlated refinancing abilities among di↵erent countries for the disruption of government bond markets in a currency union. Following Morris and Shin (2004) we use a global games framework and model the simultaneous investment decision into two assets, which are subject to correlated fundamental states, as a coordination problem with correlated imperfect information. Based on this model we evaluate the role of information about one country for the coordination of creditors of another country. We find, however, that the contagious e↵ects on the price of debt precipitated through correlation are modest. Hence, assuming that investors behave as modeled in the global game, we conclude that correlated fundamentals that precipitate informational spillovers appear to be unlikely to play a major role for e.g. the disruption of some Eurozone government bond markets in the aftermath of the recent financial and economic crisis.

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Information-based contagion and the implications for financial fragility

Cited by 20 publications

References 24 publications

A Wake-Up Call: Information Contagion and Strategic Uncertainty

A Wake-Up Call: Information Contagion and Strategic Uncertainty

Contagion through common borrowers

Correlation and coordination risk

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