Financial Contagion Through Attention Reallocation: An Empirical Analysis

Abstract

This paper provides suggestive evidence of financial contagion between regions by fluctuations in international investors' attention allocation. Using Financial Times news stories about Thailand as a proxy for attention allocated to Southeast Asia, we find that the increase in uncertainty about Southeast Asian stock markets between January of 1997 and July of 1998 was associated with a higher attention allocated to this region. We also find that one more news story about Thailand in the Financial Times was statistically associated with a 6% (5%) increase in the stock market volatility of Brazil (Chile). This finding is consistent with financial contagion through attention reallocation of international investors.

Keywords: Contagion, Emerging Markets, Financial Crisis, Rational Inattention

JEL Classification: F30, G15, D83