What is 'Contagion'

Contagion is the spread of market changes or disturbances from one regional market to others. It can refer to the diffusion of either economic booms or economic crises throughout a geographic region. Contagions occur both globally and domestically, but they have become more prominent phenomena as the global economy has grown and economies within certain geographic regions have become more correlated with one another. Contagion is seen by many academics and analysts as being primarily symptomatic of global market interdependence.


Usually associated with financial crises, contagions can be manifested as negative externalities diffused from one crashing market to another. In a domestic market, it can occur if one large bank sells most of its assets quickly and confidence in other large banks drops accordingly. In principle, the same process occurs when international markets crash, with cross-border investment and trade contributing to a domino effect of closely correlated regional currencies, as in the 1997 crisis when the Thai baht collapsed. This watershed moment, the roots of which lay in gross excess of dollar-denominated debt in the region, quickly spread to nearby East Asian countries, resulting in widespread currency and market crises in the region. Fallout from the crisis also struck emerging markets in Latin America and Eastern Europe, which is indicative of the capacity of contagions to spread quickly beyond regional markets.

Contagions are named as such for their potential to spread quickly and (seemingly) unexpectedly. Global investment and cross-border trade make financial contagions more likely, especially among developing countries or emerging markets. In these markets, contagions are often exacerbated by asymmetric information, which results in both unsustainable investments and reactionary market downturns in response to the weakening of nearby or closely correlated markets. Larger and more established markets are better able to weather financial contagions than developing economies; despite neighboring most of the Asian countries afflicted by the crisis, China's markets emerged largely unscathed.

A Brief History of Financial Contagion

The term was first coined during the 1997 Asian financial markets crisis, but the phenomenon had been functionally evident much earlier.

After the Asian financial crisis, scholars started to investigate how previous financial crises spread across national borders, and they concluded that the "nineteenth century had periodic international financial crises in virtually every decade since 1825." In that year, a banking crisis that originated in London spread to the rest of Europe and eventually Latin America. In a pattern that has been repeated ever since, the roots of the crisis were in revolution and growth at the periphery of the global financial system. After much of Latin America had been liberated from Spain in the early part of the 19th century, speculators in Europe poured cash into the continent. Investment in Latin America became a speculative bubble, and in 1825, the Bank of England, fearing massive gold outflows, raised its discount rate, which in turn sparked a stock market crash. The ensuing panic spread to continental Europe.

The global Great Depression, triggered by the 1929 U.S. stock market crash, remains an especially striking example of the effects of contagion in an integrated global economy.

  1. Minsky Moment

    When a market fails or falls into crisis after an extended period ...
  2. Spread

    1. The difference between the bid and the ask price of a security ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices.
  4. Reverse Calendar Spread

    An options or futures spread established by purchasing a position ...
  5. Spread Option

    A type of option that derives its value from the difference between ...
  6. Credit Spread

    1. The spread between Treasury securities and non-Treasury securities ...
Related Articles
  1. Insights

    5 Economic Effects Of Country Liberalization

    Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification and profit.
  2. Financial Advisor

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  3. Investing

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
  4. Investing

    Will Spain Exit the Euro?

    With a "no" vote in last Sunday’s referendum on whether the Greek people would accept imposed austerity measures, chances of a Greek exit from the euro have substantially increased. Will Spain ...
  5. Investing

    What Are The Best Funds to Short Global Equities?

    Discover the three best mutual funds that bearish investors can use to short global markets, and learn which fund is best suited for your portfolio.
  6. Insights

    5 Other Countries Affected By A Troubled Europe

    These countries have significant trading relationships with European countries, and could feel the brunt of a euro collapse.
  7. Trading

    The Hazards Of Currency Movements

    Devaluation and revaluation are official changes in the value of a nation’s currency in relation to other currencies. The terms are generally used to refer to officially sanctioned changes in ...
  8. Insights

    Investing During Geopolitcal Crises

    In the last year there has been one unexpected geopolitical crisis after another.
  1. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
  2. How do I set a strike price in an options spread?

    Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads ... Read Answer >>
  3. What are the biggest risks involved with financial spread betting?

    Learn about financial spread betting, the risks involved with spread betting and the dangers of placing financial spread ... Read Answer >>
  4. What's the difference between a credit spread and a debt spread?

    Learn about debit and credit option spread strategies, how these strategies are used, and the differences between debit spreads ... Read Answer >>
  5. What is the long-term sector outlook for financial services?

    Read about a few potential threats to the remarkable levels of growth in the financial services sector that have occurred ... Read Answer >>
  6. What are the similarities and differences between the savings and loan (S&L) crisis ...

    Learn about some of the similarities and differences between the savings and loan crisis and the subprime mortgage crisis ... Read Answer >>
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center