Contagion definition

Contagion is the spread of financial stress from one market, country, sector, or asset class to another. It can turn a problem in one place into a wider financial event.

Contagion travels through direct financial links or through investor behaviour. Banks, funds, companies, and governments may hold exposure to the same assets or counterparties, and investors may sell across the board when confidence drops, so stress reaches prices, yields, exchange rates, credit spreads, and liquidity well beyond its source.

Contagion is not the same as systemic risk. Systemic risk is the danger that the whole financial system could seize up or fail; contagion is the channel through which a shock in one part travels to the rest. An idiosyncratic shock that stays inside its own market is the opposite case, where no contagion takes hold.