English, Article, Journal or magazine article edition: Financial Contagion and Attention Allocation Jordi Mondria

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Bookmark: http://trove.nla.gov.au/version/30575
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Financial Contagion and Attention Allocation
Author
  • Jordi Mondria
Physical Description
  • preprint
Notes
  • Financial Crises, Rational Inattention, Portfolio Choice
  • RePEc:tor:tecipa:tecipa-254
  • This paper explains financial contagion between two independent stock markets by fluctuations in international investors' attention allocation. I model the process of attention allocation that underlies portfolio investment in international markets using rationally inattentive agents. Investors optimally allocate more attention to a region hit by a financial crisis, to the detriment of other markets. The resulting endogenous increase in uncertainty causes the risk premium on all risky assets to rise. Hence, stock prices around the world collapse and there is a flight to quality. I show that the degree of (non)anticipation of a crisis is crucial for the existence of contagion. Using Financial Times coverage as a proxy for attention allocation, I find strong support for the model's predictions
  • Financial Contagion, Emerging Markets, Rational Inattention
  • RePEc:red:sed006:177
Language
  • English
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