Contagion - Definition by Worldbank
May 8, 2008 – 11:48 pmThe World Bank has a fairly comprehensive overview over different definitions of contagion and documents related to recent contagious events in the financial markets.
Some excerpts:
Topics of this post: contagion, definition, General, world bank
- Broad Definition: Contagion is the cross-country transmission of shocks or the general cross-country spillover effects.
- Restrictive Definition: Contagion is the transmission of shocks to other countries or the cross-country correlation, beyond any fundamental link among the countries and beyond common shocks. This definition is usually referred as excess co-movement, commonly explained by herding behavior.
- Very Restrictive Definition: Contagion occurs when cross-country correlations increase during “crisis times” relative to correlations during “tranquil times.”
- Fundamental Links Among Countries:
- Financial links exist when two economies are connected through the international financial system through portfolio investment.
- Real links are the fundamental economic relationship among economies through trade and foreign direct investment (more papers here).
- Political links are the political relationships among countries because of “clubs of countries” with similar exchange rate arrangements (more papers here.
- Herding Behavior: Asymmetric information makes markets move jointly. Herding may be rational for a private investor due to transaction costs when gathering information. On the public level, contagion can cause market excuberance, balance of payments and banking crises (more papers here).
- Papers on Policy Options