Contagion is greatly feared in today's world financial system. The possibility that the collapse of one country's equity market or banking system can spill over to other countries is a grave concern of policy makers.
Contagion can occur in all types of financial markets.
In this paper, we examine the most traditional form of contagion, runs on a single bank in the uninsured nineteenth century American banking system. Industry specific contagion occurs when information about one bank adversely affects all banks including healthy ones that share few characteristics with troubled banks. Runs of this type are referred to as noninformational contagion. In these models, runs occur when each depositor believes that others will run on the bank and force it into liquidation. Fear of being last ignites a run, which are randomly occurring events a rational equilibrium.