What is "financial contagion"?

The concept of "financial contagion" refers specifically to a situation in which adverse market disturbances or negative economic impacts in one region or country lead to a similar negative impact in other regions or countries. This typically occurs through interconnected financial systems where vulnerabilities can create a domino effect, amplifying economic downturns across borders.

When a financial crisis happens in one area, it can trigger investors to react fearfully, leading to sell-offs and decreased confidence in other markets, even if those markets are fundamentally sound. This negative spillover effect characterizes financial contagion, differentiating it from other phenomena that may involve positive trends or increased trade, which do not carry the same risk of harmful repercussions spreading across markets.

The other options refer to different economic situations. For instance, the spread of positive economic trends indicates beneficial growth rather than adverse effects, while an increase in global trade focuses on economic activity rather than transmission of downturns. A trend indicating decreased market volatility does not capture the essence of contagion, which inherently involves increased risk and instability. Thus, understanding financial contagion involves recognizing its potential for spreading distress across interconnected markets.