Rethinking financial contagion: Information transmission mechanism during the COVID-19 pandemic

Rapidly growing numbers of empirical papers assessing the financial effects of COVID-19 pandemic triggered an urgent need for a study summarising the existing knowledge of contagion phenomenon. This paper provides a review of conceptual approaches to studying financial contagion at four levels of information transmission: (i) Catalyst of contagion; (ii) Media attention; (iii) Spillover effect at financial markets; (iv) Macroeconomic fundamentals. We discuss the unique characteristics of COVID-19 crisis and demonstrate how this shock differs from previous crises and to what extent the COVID-19 pandemic can be considered a ‘black swan’ event. We also review the main concepts, definitions and methodologies that are frequently, but inconsistently, used in contagion literature to unveil the existing problems and ambiguities in this popular area of research. This paper will help researchers to conduct coherent and methodologically rigorous research on the impact of COVID-19 on financial markets during the pandemic and its aftermath.