Financial contagion

The term contagion effect (of English contagion -. Ger of infection, disease or harmful effect ) describes the infection or the transfer of a financial and / or currency crisis seemingly unbetroffene and possibly geographically distant countries, which apparently no significant relations have each other. The designation is based on the medicine, in a pandemic means the country and across continents spread of a disease.


Crisis-induced contagion effects are a very young object of investigation of finance. Contagion is a financial economic research concept in the mid- nineties began with the spread of financial crises, when a localized crisis spread suddenly over many developing countries and countries covered that were considered not crisis- vulnerable and seemingly " healthy " were. Because a systematic financial research on infection only in the 1990s - about before the start of the Asian crisis - has used, exist in the economic literature, no uniform definition, but only different explanations. A very wide - and therefore less vulnerable - Definition tried the World Bank: " Contagion is the cross-border transfer of exogenous shocks, similar to a spillover effect. Contagion occurs both in crises and in non- crisis times, with Contagion not necessarily be connected to a crisis must ".

As the attempt to define the World Bank shows, is one of the main problems of a generally accepted definition in the containment of the infection cause. A risk of infection is quite microeconomic, so you can start from a single company and then - as by its links - on the whole industry, and possibly beyond that to spill over. Thus, the bankruptcy of Lehman Brothers in September 2008, ultimately with each other triggered a distrust of banks, which is detectable by mutual attentism the banks on the interbank markets.

In connection with empirical studies that deal with the international impact of currency crises, the significant increase in the probability of a crisis in one country is designated under the condition that a crisis occurs in a country other than Contagion.

In another approach, Contagion is referred to as the phenomenon that occurs when the volatility of a crisis country transfers on the financial market of another country, the so-called volatility spillover. This definition per se refers to the fact that the volatility of asset prices is a very good approximation of market uncertainty. It is assumed in the approach of the volatility spillover from the fact that it could be an indicator of the spread of a crisis in financial markets in different independent countries, each with above-average volatility. In the Asian crisis led, for example, the boom in the construction industry too often overvalued assets may be in the flourishing on the financial market company, which already had a warning sign for the spreading of the crisis after the volatility spillover approach.

A similar approach, which is more of a macroeconomic oriented, sees Contagion as occurring in parallel in different countries, extraordinary fluctuations in the prices and volumes of consumption and investment goods. The problem that arises here is how to distinguish between normal and excessive direct movements in prices and quantities is possible by simple dependencies.

The approach of shift- contagion in this case differs from the above macroeconomic approach is that in the pre-crisis such equality movement with respect to prices and quantities need not be a condition in different countries. The occurrence of a crisis in a market exceptional fluctuations in the prices and volumes of consumption and investment goods can be triggered and thus indirectly lead to a crisis transmission in another market.


Also on the cause of Contagion, the science has not yet come to an agreement. Mostly following reasons were given for the simultaneous occurrence of financial crises in different countries or regions.

  • Political decisions in developed countries may have unexpectedly similar effects on developing countries.
  • A crisis could act in a developing country on the macroeconomic fundamentals in another developing country. Examples would be when a devaluation of the currency, the competitiveness of other countries reduced or if in a market because of liquidity problems, the financial intermediary will be forced to liquidate their investments in other developing countries.
  • A crisis in one country could trigger a crisis somewhere else, which can not be explained by a change in the macroeconomic fundamentals, such as a shift of the estimates and the expectations of market participants based on existing information. A crisis could then cause the investors to assess the fundamentals of other countries again, even if these have not changed, and changed their risk tolerance.

Types of infection

Contagion effects are a distribution mechanism that can expand systemic risks or systemic events from one part of the system (institution, market or State) to the entire financial system. This can be done either through a domino effect, or by an information effect. In the domino effect the infection is directly due to the current structure of the financial system. In the information effect, however, the infection does not happen immediately, but over ( quite rationally comprehensible ) expectation changes in market participants.

Gerhard Aschingers describes four different types of infection:

  • Infection by fundamental variables:

A crisis spreads from one country to countries with similar fundamentals. Investors respond sensitively to countries with yourself balancing measures risk structure. It also speaks of a so-called " Aufweckeffekt " ( "wake up effect" ).

  • Contagion of economic integration:

If two countries real economies are closely intertwined or are they competitors in third markets, this results in a risk of infection. The devaluation of the currency of one country for example, can lead to a collapse of the competitiveness of another country.

  • Contagion via the financial markets:

Due to the increasing globalization are foreign exchange and stock markets so closely linked that falling securities prices in one country can lead to sales reactions to other submarkets, so that a crisis can spread. This is not limited solely to foreign exchange and equity markets, but can affect all financial markets ( money, capital and derivatives markets).

  • Infection by herd behavior:

In this type of infection, the asymmetric information among investors plays the main role. Due to high information acquisition costs or for other individual reasons many investors assume the expectations of some (supposedly) better -informed investors. Thus a pessimistic mood may prevail, that is not justified by corresponding fundamentals, and that leads to a self-fulfilling effect.

Typical contagion effects on the example of the Asian crisis

Many crises had originally started as a regional crisis and were then transferred to other states. For Wirth, the contagion an important feature of currency crises represents the currency crisis of a state, in turn, can - for example through its economic or political ties - consider other States affected.

Such contagion effects have played a significant role in the Asian crisis than first South Asian, but then lying outside the region, such as Russia or the Baltic States were infected. The trigger of the Asian crisis, Thailand is classified generally. There, the local currency baht was released from its U.S. dollar peg to the floating on 2 July 1997. On the same day, the price fell by almost 14 %, at the end of the month it was 23 % lower. Traditional fundamental warning signals such as deficits in the current account, overvalued exchange rates, decline in export growth or net foreign direct investment, which raises some concerns would have had to give, were ignored. On the other hand, fiscal and monetary policy in Asia households were always appropriately conservative, inflation rates compared to developing countries low, mostly under control, and sovereign debt generally not excessive. This negative developments were outweighed by positive fundamentals, at least. Then the crisis also other countries in the region such as Indonesia still in July 1997, South Korea in October 1997, and in November 1997 the entire Tiger -State area was eventually affected. Through this Asian crisis also investors in Russia had become nervous, so there was a greater outflow of capital, which was accompanied by a large government budget deficit (see Russian crisis ). On 27 May 1998, interest rates were increased to 150 % here. Finally, the IMF helped, as he had done this already massively in the Asian crisis. The Asian crisis and the falling price of oil Hauptexportguts had triggered the crisis in Russia. In the Baltics, the Russian crisis of favorable economic development in the year 1999, after years of recession.