A wake-up call theory of contagion

We propose a novel theory of financial contagion. We study global coordina-tion games of regime change with an initially uncertain correlation of regional fundamentals. A crisis in one region is a wake-up call to investors in another region that induces a re-assessment of local fundamentals. Contagion after a wake-up call can occur even if investors learn that fundamentals are uncorre-lated and common lender effects or balance sheet linkages are absent. Appli-cable to currency attacks, bank runs, and debt crises, our theory of contagion is supported by existing evidence and generates new testable implications fo