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Financial Contagion and Attention Allocation

Authors


  • Corresponding author: Jordi Mondria, Department of Economics, University of Toronto and University of North Carolina, Chapel Hill. Email: jordi.mondria@utoronto.ca.

  • We thank Antonio Battiato, Markus Brunnermeier, Claudio Campanale, Andrea Civelli, Vasco Cúrdia, Ainos Eciffero, Pete Kyle, Asier Mariscal, Ulrich Müller, Ricardo Reis, Hélène Rey, Chris Sims, Thomas Wu, Wei Xiong, the editor Andrew Scott, two anonymous reviewers, and all the seminar participants at CREI, IESE, Princeton, UBC, UCSC, University of Toronto, Econometric Society World Congress and Congress of the European Economic Association for their comments and suggestions. We also thank Nathan Carroll for excellent proof-reading. Mondria gratefully acknowledges financial support from the Rafael del Pino Foundation and Quintana-Domeque acknowledge financial support from the Bank of Spain, the Rafael del Pino Foundation and the Spanish Ministry of Science and Innovation (ECO 2008-05721/ECON). A previous version of this article circulated as a working paper of the Instituto Valenciano de Investigaciones Económicas (IVIE), WP-AD 2012-07. All remaining errors are ours.

Abstract

We explain financial contagion between two stock markets with uncorrelated fundamentals using fluctuations in international investors’ attention allocation. We also show that the degree of (non)anticipation of a crisis is crucial for the existence of contagion. Using daily data on stock market prices and news stories in the Financial Times, we find evidence supporting the attention reallocation mechanism of financial contagion: The higher the price volatility of the Asian market, the more absolute and relative attention allocated to the Asian market, and the more relative attention allocated to the Asian market, the higher the price volatility of Latin American markets.

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