Financial contagion in financial markets: a systematic literature review and directions for future research

Purpose This paper aims to provide a comprehensive overview of the existing knowledge on financial contagion through a systematic literature review. Financial contagion, the phenomenon of events spreading and affecting financial markets, has gathered significant attention from scholars and practitioners. Numerous studies have been conducted on this topic, necessitating a thorough examination of the diverse approaches and findings related to financial contagion. Design/methodology/approach This study reviews financial contagion research in the Web of Science (WoS) and Scopus databases, analyzing 66 articles. This review, based on selected keywords and defined criteria, has a total of 1,470 citations referencing these articles as of April 2023. Notably, the GARCH model and the Copula model emerged as prominent methodologies for investigating the financial contagion effect. Findings The results reveal the interconnectedness of financial markets, where economic and financial instabilities in one country affect others. The insights obtained from articles retrieved from the WoS and Scopus databases are as follows: The analyzed studies span the time range of 1999–2023. The publication count was minimal in 1999–2000 (1 each) and peaked in 2021 (13 articles), indicating a rising trend in research on financial contagion in recent years, reflecting an increased focus on the topic. The majority of articles related to financial contagion and corruption have multiple authors. Research limitations/implications This study’s limitation is that network indicators are only used as explanatory variables. Future research could use these indicators to illustrate the topological configurations of financial structures, elucidating the dynamic evolution of financial networks and advancing a thorough understanding of contagion mechanisms from a network perspective. Practical implications Policymakers should consider the effects of financial contagion cross various financial markets, particularly in neighboring nations, when establishing policies address a financial crisis. Countries need to protect their economic frameworks, ensure the smooth operation of their economies and manage investment decisions within acceptable risks levels. Examining the impact of financial crises and pandemics on the financial system’s vulnerability to financial contagion is essential for policymakers and risk to develop effective strategies. Originality/value By synthesizing current research findings, this paper provides insights into potential avenues for future studies on this critical topic, thereby enhancing the understanding of financial contagion. This paper enriches the existing literature by presenting a systematic overview of financial contagion research, concentrating on financial contagion during periods of financial crises and pandemics and emphasizing the increasing interest in this field in recent years. Furthermore, this paper adds to the literature on the financial contagion effects of COVID-19, offering a clearer understanding of the nature of this crisis and its distinctive characteristics.