The domino model of contagion is fl awed, and is not useful for understanding fi nancial contagion in a modern, market-based fi nancial system. Instead, the key to understanding the events of 2007 is to follow the reactions of the fi nancial institutions themselves to price changes, and to shifts in the measured risks. Financial institutions manage their balance sheets actively in response to price changes and to changes in measured risk. Since market-wide events are felt simultaneously by all market participants, the reactions to such events are synchronized. If such synchronized reactions lead to declines in.
