Financial Contagion and the Wealth Effect: An Experimental Study

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Title: Financial Contagion and the Wealth Effect: An Experimental Study
Authors: Bayona, AnnaPeia, Oana
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Date: Mar-2020
Online since: 2020-07-23T15:38:20Z
Abstract: We design a laboratory experiment to test the importance of wealth as a channel for financial contagion across markets with unrelated fundamentals. Specifically, in a sequential global game, we analyze the decisions of a group of investors that hold assets in two markets. We consider two treatments that vary the level of diversification of these assets across markets, which allows us to disentangle the wealth effect from other sources of financial contagion. We provide evidence of contagion due to a wealth effect when investors have completely diversified portfolios. In this treatment, for certain ranges of fundamentals, we show that a coordination failure in the first market reduces investors' wealth, which makes them more likely to withdraw their investments in the second market, thereby increasing the probability of a crisis.
metadata.dc.description.othersponsorship: Universitat Ramon Llull
Generalitat de Catalunya
Spanish Ministry of Science, Innovation and Universities
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Start page: 1
End page: 38
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP2020/07
Copyright (published version): 2020 the Authors
Keywords: Financial contagionFinancial crisesWealthCoordination gamesGlobal games
metadata.dc.subject.classification: C72; C92; D8; G01; G11
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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