The Uncertainty Channel of Contagion

The 2007 subprime crisis in the U.S. triggered a succession of financial crises around the globe, reigniting interest in the contagion phenomenon. Not all crises, however, are contagious. This paper models a new channel of contagion where the degree of anticipation of crises, through its impact on investor uncertainty, determines the occurrence of contagion. Incidences of surprise crises lead investors to doubt the accuracy of their informationgathering technology, which endogenously increases the probability of crises elsewhere. Anticipated crisis, instead, have the opposite effect. Importantly, this channel is empirically shown to have an independent effect beyond other contagion channels.Economic models;Sovereign debt;Spillovers;Stock markets;investors, contagion, crisis country, rate of return, currency crises, financial contagion, financial crises, financial crisis, crisis countries, mutual funds, stock market crisis, foreign investors, expected value, investment decisions, crisis episode, crisis ? country, return on investment, asian financial crisis, speculative attacks, private capital, international finance, foreign investment, information asymmetry, international financial contagion, global financial crisis, marginal analysis, crisis probability