# Contagion

`kaal:entity:contagion`

**Status.** derived

This node is assembled mechanically from the 11 claims that carry the concept tag `contagion`. It is a roster of what the corpus says under this term. It is **not** an adjudicated definition: no single statement here has been ruled canonical, and no first-appearance call has been made. Read the claims and judge for yourself.

## Every claim under this term

11 claims across 7 works, 2011 to 2019.

**2011**

- [1908473-016](https://wulfkaal.github.io/claims/1908473-016) [mechanism/argued] -- By internalizing the costs of bank failure, contingent capital can reduce moral hazard, and because a contingent debt security with a conversion trigger would presumably not default, it helps avoid contagion and systemic spillovers.
  > By internalizing bank failure costs, contingent capital may contribute to minimizing moral hazard. A contingent debt security with a conversion trigger would presumably not default and could thus help avoid contagion and systemic spillover effects, which in turn may limit systemic risk.
  Wulf A. Kaal, Christoph Henkel, Contingent Capital with Sequential Triggers (2011). SSRN: https://ssrn.com/abstract=1908473

**2012**

- [1998455-020](https://wulfkaal.github.io/claims/1998455-020) [failure/argued] *(failure mode)* -- A mandatory contingent capital issuance regime induces institutions to buy their competitors' securities to satisfy regulatory obligations rather than for economic reasons, and the resulting cross holdings among systemically important institutions undermine the ability of contingent capital to limit systemic risk and contagion.
  > A detrimental result of such a practice could be CCS cross holdings among SIFIs. Cross holdings of CCS by SIFIs could undermine the effectiveness of CCS and its ability to limit systemic risk and contagion.
  Wulf A. Kaal, Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance (2012). SSRN: https://ssrn.com/abstract=1998455
- [1998455-028](https://wulfkaal.github.io/claims/1998455-028) [definitional/argued] -- Contingent capital securities approximate the characteristics of a quasi-public good: just as ships cannot readily be excluded from a lighthouse, systemically important institutions benefit from the issuance of contingent capital by other such institutions whenever the design minimizes systemic risk and contagion.
  > CCS could have the potential to approximate quasi-public good characteristics. Similar to the difficulty of excluding ships from using the services of a lighthouse,219 SIFIs may benefit from the issuance of CCS by other SIFIs if the CCS design min- imizes systemic risk and contagion.
  Wulf A. Kaal, Initial Reflections on the Possible Application of Contingent Capital in Corporate Governance (2012). SSRN: https://ssrn.com/abstract=1998455
- [2061166-004](https://wulfkaal.github.io/claims/2061166-004) [failure/evidenced] *(failure mode)* -- Purely national crisis measures proved ineffective during the financial crisis because they could not reach cross-border banking operations or contain contagion, as the failures of Lehman Brothers, Fortis, the Icelandic banks, Northern Rock and Hypo Real Estate Holding demonstrated.
  > national measures proved ineffective and failed to address cross-border banking operations or contagion.
  Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012). SSRN: https://ssrn.com/abstract=2061166
- [2061166-016](https://wulfkaal.github.io/claims/2061166-016) [failure/argued] *(failure mode)* -- The supervisor's discretion to set a deadline for a recovery plan before issuing a transfer order is unlikely ever to be exercised in practice, because in a crisis time will be of the essence to prevent contagion.
  > Considering the turmoil of the financial crisis, it is doubtful that the Authority will ever have the privilege to exercise this discretion as time will be of the essence to prevent contagion.
  Christoph K. Henkel, Wulf A. Kaal, Contingent Capital in European Union Bank Restructuring (2012). SSRN: https://ssrn.com/abstract=2061166

**2014**

- [2470008-006](https://wulfkaal.github.io/claims/2470008-006) [mechanism/argued] -- Hedge funds threaten the financial system through two distinct channels: directly, by damaging systemically important financial institutions, and indirectly, by generating liquidity shocks and raising volatility in key markets.
  > In addition to posing a direct systemic risk by damaging systemically important financial institutions, hedge funds can also pose an indirect threat to the financial system by generating a liquidity shock and increasing market volatility in key markets.
  Wulf A. Kaal, The Systemic Risk of Private Funds after the Dodd-Frank Act (2014). SSRN: https://ssrn.com/abstract=2470008

**2016**

- [2748096-008](https://wulfkaal.github.io/claims/2748096-008) [condition/argued] -- Market events like the LTCM failure can escalate into global financial crises when many highly leveraged hedge funds holding illiquid portfolios are obligors of a small number of major financial institutions, because adverse price movements dry up credit and depress collateral values.
  > A large part of the literature recognizes that market events such as the LTCM failure may lead to global financial crises if many highly leveraged hedge funds with illiquid portfolios are obligors of a small number of major financial institutions
  Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096
- [2748096-012](https://wulfkaal.github.io/claims/2748096-012) [failure/argued] *(failure mode)* -- The contagion story, in which hedge fund losses spread to other financial institutions and undermine systemic stability, is counterbalanced in practice because hedge fund collapses are rarely sudden and almost always unfold in incremental steps over a long period.
  > First, hedge fund collapses are rarely sudden but in practice almost always occur in incremental steps over a long time period.
  Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096
- [2748096-024](https://wulfkaal.github.io/claims/2748096-024) [definitional/evidenced] -- Hedge fund contagion is defined as correlation over and above what one would expect from economic fundamentals, and clusters of suboptimal returns across investment styles count as contagion precisely because known risk factors for hedge fund performance cannot explain them.
  > Because risk factors associated with hedge fund performance cannot explain such clusters, they can reflect contagion (Boyson et. al. 2010).
  Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096

**2019**

- [3396542-031](https://wulfkaal.github.io/claims/3396542-031) [mechanism/argued] -- In the proposed design, bad business decisions by one underwriter need not impact other underwriters or the DAO, because losses from underestimating the insured risk fall purely on that underwriter so long as the staked tokens cover the claim.
  > If a certain underwriter makes the mistake of underestimating the risk of the insured event, the losses will be suffered purely by the underwriter as long as the value of the staked or encumbered tokens covers the claim.
  Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Decentralized Underwriting (2019). SSRN: https://ssrn.com/abstract=3396542
- [3406323-027](https://wulfkaal.github.io/claims/3406323-027) [design/argued] -- Democratized decentralized underwriting is more secure and stable than centralized underwriting because diversifying lenders and underwriters adds liquidity in all states of the economy and silos losses so that there is less cascading during economic crises.
  > it diversifies lenders and underwriters, which adds liquidity in all states of the economy; 2. this diversity silo losses so there is less cascading during economic crises;
  Wulf A. Kaal, Decentralization - A Primer on the New Economy (2019). SSRN: https://ssrn.com/abstract=3406323

## Verify

Every claim above resolves to a record carrying a verbatim source quote, the sha256 of the source PDF, and a preformatted citation. Nothing here asks to be taken on trust.

    curl -s https://wulfkaal.github.io/entities/contagion.md | sha256sum

**Canonical form.** This markdown file is the canonical hashed representation of this entity node. Its sha256 is the content hash.