Market Contagion
When a shock in one market or geography forces deleveraging or revaluation in nominally unrelated markets, usually via balance-sheet linkages.
Definition
Contagion is the spread of stress beyond the asset or region where it originated. It travels through three main channels: leverage (a fund sells liquid assets to cover losses elsewhere), counterparty exposure (banks pull lines), and correlation regime shifts (everything correlates in a crisis).
Contagion episodes are why diversification appears to fail exactly when investors need it.
Public research record
Research framework · page evidenceCompleted application: Market Contagion
Most large drawdowns are contagion events. Sizing risk by asset volatility alone ignores the cross-asset selling that defines crisis returns.
| Type | Claim | Scope |
|---|---|---|
| Release fact | When a shock in one market or geography forces deleveraging or revaluation in nominally unrelated markets, usually via balance-sheet linkages. | Macro |
| Release fact | LTCM 1998: a Russian sovereign default forced LTCM to liquidate emerging-market and developed-market positions simultaneously, transmitting stress to US credit, swap spreads, and equity volatility. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
Why it matters
Most large drawdowns are contagion events. Sizing risk by asset volatility alone ignores the cross-asset selling that defines crisis returns.
Worked example
LTCM 1998: a Russian sovereign default forced LTCM to liquidate emerging-market and developed-market positions simultaneously, transmitting stress to US credit, swap spreads, and equity volatility.