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On October 19, 1987 (Black Monday) stock prices in Hong Kong began collapsing and spread throughout the day into the Europe and then North America. This is an example of contagion. [TRUE]
The Contagion Effect
Contagion is a situation which a financial crisis is triggered by financial crisis that occurred elsewhere or in other words from one institution spreads to other institutions (such as a bank one spread to other banks, or a currency/stock market crash in one countries spread to other countries). If the failure of a financial institutions threaten the stability of other institutions then this called systemic risk.
Financial crises arise because of correlations between markets or country so that as a consequence there is attention that increased in contagion which is broadly defined as transitions from shocks between markets or countries.
According to Yang (2004) contagion is a phenomenon when a financial crisis that occurs in a country will trigger financial crises in other countries. There is more than one definition that can explain the contagion effect, the World Bank has three definition, namely:
1) Contagion in the broadest sense is surprise
transmitted across national borders, or mutual influence between countries. Contagion can occur under normal conditions or crisis.
2) Transmission of a shock across national borders
or in general the occurrence of a significant correlation between countries that occur outside some fundamental channels.
3) Connecting contagion with a phenomenon when
the correlation between countries increased during the crisis period compared to the correlation in the economic period normal.
Based on this definition, there are four criteria
can be used to detect whether there is a contagion effect, that is based on the correlation of asset prices, conditional probability of currency crises, the transmission of changes in volatility and movement of capital flows
Learn more about contagion at https://brainly.com/question/12101457.
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