Template-Type: ReDIF-Paper 1.0

Author-Name: Fritzi Koehler-Geib
Author-X-Name-First: Fritzi
Author-X-Name-Last: Koehler-Geib

Title: The Uncertainty Channel of Contagion

Abstract: 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.
Length:  44 pages
Creation-Date:  2007-10
File-URL: http://www.bgpe.de/texte/DP/034_koehler.pdf
File-Format: Application/pdf
File-Function: First version, 2007
Number: 034
Classification-JEL: C72, D82, D84, F21, F32, F34, F41
Keywords: Capital Flows, Government debt, Sudden Stops, Global Games, Coordination Failure
Handle: RePEc:bav:wpaper:034_koehler