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What is Contagion? What are its causes? Explain. What causes herding in financial markets?

What is Contagion? What are its causes? Explain. What causes herding in financial markets?

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Contagion is a situation when financial institution or other industry defaults in economy and the risk associated with this industry gets widespread because of interrelation in the the whole economy.

Contagion spread because there is a dependency of one company on to other. It can be understood through an example that when great recession happend,The fall of one investment banking company led to fall of other and it triggering widespread collapse.

The causes of contagion is dependency of one sector on to other, high credit, bad landing,irrational market rallies and irrational fueling of the Liquidity in the market.

herding is a behaviour in the finance in which people tend to follow the overall market even they have no rational reason to follow.herding can be seen in the irrational bull market rallies when people buy out of fear of missing out.

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