Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228187
Authors: 
Bayona, Anna
Peia, Oana
Year of Publication: 
2020
Series/Report no.: 
Working Paper Series No. WP20/07
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.
Subjects: 
Financial contagion
financial crises
wealth
coordination games
global games
JEL: 
C72
C92
D8
G01
G11
Document Type: 
Working Paper

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