An Inquiry Into Contagion Transmission And Spillover Effects In Stock Markets

This paper represents a theoretical enquiry in contagion and its transmission mechanism. Our main purpose in to present the different views regarding contagion as a mechanism, correlated with interdependence, a state of markets. We present numerous theories about the definition and the transmission of shocks. But As Rigobon (2002) states, the main problem of the theoretical literature of contagion is that the measurable events are more rare that the number of possible hypothesis. So the only aspect on which everybody agrees is that there is no unanimously accepted interpretation of contagion. The channels of contagion, according to our reasoning and based on the directions pointed out by theoretical literature, can be divided into channels which act in interdependent markets, and channels which can be attributed to investors behavior. In this case the cause of propagating the shock becomes the criterion upon which the transmissions of channels are classified. In this paper we present these channels together with their characteristics.