Kasinomics

Contagion - Definition by Calomiris

In his article on Global Financial Architecture, Charles Calomiris defines “Contagion”:

Correlations in asset returns are much higher across emerging market countries during crises than at other times, and even government bond yields move together to an unusual degree during financial crises. There are several explanations for this “contagion.”

• One is irrationality on the part of investors.
• A second is rational portfolio rebalancing by international investors; if portfolio investors (like banks) target a given default risk on the debt they issue, then they will endogenously shrink asset risk in one country in response to capital losses or exogenous increases in asset risk in another country.
• A third explanation revolves around linkages in international trade that can transmit economic decline, which is then reflected in asset prices.
• A fourth explanation revolves around multiple equilibria (either through changes in speculators views about the probability of bad equilibria, or through reductions in central bank liquidity following a global flight to quality).

See also

• Trilemma in financial supervision - Schoenmaker, Oosterloo
• Systemic Risk - Discussion by Alexander, Eatwell, Dhumale
• Contagion - Definition by Worldbank
• What is a Hedge Fund (or how do they differ from mutual funds)?
• Pro-Cyclicality - Discussion of the problem and possible solutions
• Intergovernmentalism in Financial Regulation
• Global Financial Governance - Definitions by Alexander, Eatwell and Dhumale
• Global Financial Architecture - Article by Charles W. Calomiris
• Global Economic Governance and IGOs - definitions by Jacobs
• G8-Action Plan on Local Bond Markets - Missing Follow-Up Documents