Contagion Risk

Contagion risk means the risk that financial stress spreads from one company, market, country, or sector to others. In simple terms, contagion risk is the danger of panic or losses spreading. Contagion risk is important because investors may sell unrelated assets when fear spreads. It can turn a local problem into a broader market or financial system issue. For example, trouble at one bank may cause investors to worry about other banks, even if those banks are stronger. Contagion risk is not always based on fundamentals. It can spread through fear, uncertainty, leverage, and forced selling.