The Uncertainty Channel of Contagion

Arbeitspapier

This paper analyzes the impact of uncertainty on the spread of stock market crises, both theoretically and empirically. The effect of uncertainty about the fundamentals on investment decisions is an important cause of financial crises propagating across countries. Firstly, a coordination game on investment illustrates the increasing effect of a surprise crisis in one country on the probability of a crisis in a second country through higher uncertainty there. An anticipated initial crisis generates the opposite effect. Secondly, these theoretical predictions are tested empirically. Fixed effects panel estimations validate the impact of the initial crisis on uncertainty in potentially-affected countries. Subsequently, probit estimations confirm the positive impact of uncertainty on the crisis probability in the affected economy. The results are robust across various specifications.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BGPE Discussion Paper ; No. 34

Classification and Topics

• Classification: Wirtschaft ; Noncooperative Games ; Asymmetric and Private Information; Mechanism Design ; Expectations; Speculations ; International Investment; Long-term Capital Movements ; Current Account Adjustment; Short-term Capital Movements ; International Lending and Debt Problems ; Open Economy Macroeconomics
• Subject: Capital Flows ; Government debt ; Sudden Stops ; Global Games ; Coordination Failure

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Koehler-Geib, Fritzi
• Event: Veröffentlichung
• (who): Friedrich-Alexander-Universität Erlangen-Nürnberg, Bavarian Graduate Program in Economics (BGPE)
• (where): Nürnberg
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/73357
• Last update: 10.03.2025, 11:42 AM CET