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Christoph Bertsch
- 15 July 2025
- WORKING PAPER SERIES - No. 3076Details
- Abstract
- Shocks to a bank’s ability to raise liquidity at short notice can trigger depositor panics. Why don’t banks take a more active role in managing these risks? We study contingent risk management (hedging) in a standard global-games model of a bank run. Banks fail to hedge precisely when the exposure to a shock is most severe, just when risk management would have the biggest impact. Higher bank capital and broader deposit-insurance coverage crowd out hedging by banks that already manage risk, yet encourage more banks to establish risk management desks in the first place. The model also yields testable implications for hedging incentives and policy design.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
- 3 May 2022
- WORKING PAPER SERIES - No. 2658Details
- Abstract
- We offer a theory of financial contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex-post exposure to region 1. We explore normative and testable implications of the model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work.
- JEL Code
- D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief
F3 : International Economics→International Finance
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages