MODEL OF FINANCIAL RISK CONTAGION IN THE GLOBAL FINANCIAL MARKETS

Abstract

The study of financial risk contagion is growing in importance with the expanding global scope of financial markets. From the end of the twentieth century, more and more linkage in financial crisis is accompanied with the globalization of economy and finance. Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, due to the rapid development of the globalization in economy and finance, spread to the rest of financial sectors and other countries whose economies were previously healthy. The mechanism through which financial risk from one country or economic sector is transmitted to other country or economic sector is very different.
In this article the mechanism of financial risk contagion process is analyzed, the ways of financial risk contagion are emphasized and the model of financial risk contagion in the global financial markets is presented. The main finding about financial contagion is that countries do not need to be linked directly by macroeconomic fundamentals in order to transmit shocks. There are a lot of other different channels of financial risk contagion by which a shock can be transmitted and a crisis can spread to other countries.

DOI: http://dx.doi.org/10.5755/j01.em.17.1.2256