Financial Contagion

  title={Financial Contagion},
  author={Franklin Allen and Douglas Gale},
  journal={Journal of Political Economy},
  pages={1 - 33}
Financial contagion is modeled as an equilibrium phenomenon. Because liquidity preference shocks are imperfectly correlated across regions, banks hold interregional claims on other banks to provide insurance against liquidity preference shocks. When there is no aggregate uncertainty, the first‐best allocation of risk sharing can be achieved. However, this arrangement is financially fragile. A small liquidity preference shock in one region can spread by contagion throughout the economy. The… 
Short-Term Liquidity Contagion in the Interbank Market
We implement a modified version of DebtRank to recursively measure the contagion effects caused by the default of a selected financial institution. In our case contagion is a liquidity issue,
Contagion Risks and Systemic Stability in Financial Networks
An agent-based model is proposed, constructing an evolutionary banking system, where interbank loans and investment strategies are, respectively, determined by liquidity shortage and utility
Contagion and interdependence in Eurozone bank and sovereign credit markets
This paper focuses on the nature of co‐movement of credit risk measured by credit default swap spreads in both banking and sovereign sectors within EMU. We test for contagion and/or interdependence
Asset Commonality in US Banks and Financial Stability
One potential threat to a stable financial system is the phenomenon of contagion, where a risk that is ordinarily small becomes a problem because of the way it spreads to other institutions.
Emerging Market Contagion Under Geopolitical Uncertainty
ABSTRACT We find that 10 emerging stock markets have high risk of contagion on the regional level but lower spillover with respect to the global markets, implying a potential for diversification
Bank Heterogeneity and Financial Stability
We investigate stability of a financial system featuring interconnected fragile banks. In the model, banks face run risks and have to liquidate long-term assets in a common market to repay runners.


Interbank Lending and Systemic Risk
Systemic risk refers to the propagation of a bank's economic distress to other economic agents linked to that bank through financial transactions. Banking authorities often prevent systemic risk
Bubbles and Crises
In recent financial crises a bubble, in which asset prices rise, is followed by a collapse and widespread default. Bubbles are caused by agency relationships in the banking sector. Investors use
A Model of Financial Fragility
A dynamic, stochastic game-theoretic model of financial fragility that considers whether fragility is worse for larger economies and whether all of its linkages break from such a crisis.
Liquidation Values and Debt Capacity: A Market Equilibrium Approach
We explore the determinants of liquidation values of assets, particularly focusing on the potential buyers of assets. When a firm in financial distress needs to sell assets, its industry peers are
Optimal Financial Crises
Empirical evidence suggests that banking panics are a natural outgrowth of the business cycle. In other words panics are not simply the result of "sunspots" or self-fulfilling prophecies. Panics
Financial Fragility and the Great Depression
We analyze a financial collapse, such as the one which occurred during the Great Depression, from the perspective of a monetary model with multiple equilibria. The economy we consider contains
Bank Runs, Deposit Insurance, and Liquidity
This paper shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face
Agency Costs, Net Worth, and Business Fluctuations
This paper develops a simple neoclassical model of the business cycle in which the condition of borrowers' balance sheets is a source of output dynamics. The mechanism is that higher borrower net
Varieties of Capital-Market Crises
In this post-modern world of high capital mobility, countries are being disciplined by the anonymous capital market. One view of the situation -perhaps the prevalent view among economists- is that
Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression
This paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period. Our approach is complementary to that of Friedman and Schwartz, who emphasized