Contagion

  • Eva R. Porras
Chapter

Abstract

Despite the vast amount of literature written on the propagation of shocks, there is no formal definition of “contagion.” For instance, the World Bank refers to three different definitions: the broad definition, the restrictive definition, and the very restrictive definition, which can be respectively explained as follows:1

Contagion is the cross-country transmission of shocks or the general crosscountry spillover effects. Contagion can take place both during “good” times and “bad” times. Then, contagion does not need to be related to crises. However, contagion has been emphasized during crisis times;

Contagion is the transmission of shocks to other countries or the crosscountry correlation, beyond any fundamental link among the countries and beyond common shocks. This definition is usually referred to as excess co-movement, commonly explained by herding behavior;

Contagion occurs when cross-country correlations increase during “crisis times” relative to correlations during “tranquil times”.

Other sources also constrict the definition of this term to crisis environments, specifically alluding to the change of co-movements or shifts in cross-market linkages. For instance, Dornbusch, Park, and Claessens (2000, p. 3)2 state that “contagion is a significant increase in cross-market linkages after a shock to an individual country (or group of countries), as measured by the degree to which asset prices or financial flows move together across markets relative to this co-movement in tranquil times,” whereas Forbes and Rigobon (2002)3 use the term shift-contagion, focusing on a change in the strength of market interconnections.

Keywords

Financial Market Mutual Fund Systemic Risk Limited Liability Private Signal 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
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Notes

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© Eva R. Porras 2016

Authors and Affiliations

  • Eva R. Porras
    • 1
  1. 1.Spain

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