This paper presents a rational expectations model of financial markets to explain financial market contagion. The model focuses on contagion through cross-market rebalancing, where investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios' exposures to shared macroeconomic risks. The pattern and severity of financial contagion depend on markets' sensitivities to shared macroeconomic risk factors and the amount of information asymmetry in each market. The model can generate contagion in the absence of news and between markets that do not directly share macroeconomic risks. The paper discusses the mechanisms of contagion, including correlated information and correlated liquidity shock channels. However, these channels are insufficient to explain the cross-sectional pattern of contagion. The model introduces a new channel, cross-market rebalancing, where investors respond to shocks in one market by optimally readjusting their portfolios in other markets, transmitting the shocks and generating contagion. When portfolio rebalancing occurs in markets with information asymmetries, the resulting price movements are exaggerated because the orderflow is misconstrued as being information-based. The model is based on a two-period endowment economy with N risky assets and a riskless asset. Investors trade the assets in the first period and consume the liquidation value of all assets in the second period. The model includes three types of participants: informed investors, uninformed investors, and noise traders. Informed investors have superior information about the liquidation value of the assets, while noise traders buy and sell assets based on their own idiosyncratic need for liquidity. The model shows that contagion can occur in the absence of public news and between countries that do not directly share common macroeconomic fundamentals. The model also illustrates how contagion can occur through cross-market rebalancing, where investors respond to shocks in one market by rebalancing their portfolios in other markets. The model provides a possible explanation for the contagion observed between countries with different macroeconomic fundamentals. It also shows that differences in information asymmetries between developed and emerging markets may explain why emerging markets were hit hard by contagion while developed markets remained relatively unscathed. The model highlights the role of macroeconomic fundamentals in determining the pattern of contagion and provides insights into the transmission of market turbulence between countries.This paper presents a rational expectations model of financial markets to explain financial market contagion. The model focuses on contagion through cross-market rebalancing, where investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios' exposures to shared macroeconomic risks. The pattern and severity of financial contagion depend on markets' sensitivities to shared macroeconomic risk factors and the amount of information asymmetry in each market. The model can generate contagion in the absence of news and between markets that do not directly share macroeconomic risks. The paper discusses the mechanisms of contagion, including correlated information and correlated liquidity shock channels. However, these channels are insufficient to explain the cross-sectional pattern of contagion. The model introduces a new channel, cross-market rebalancing, where investors respond to shocks in one market by optimally readjusting their portfolios in other markets, transmitting the shocks and generating contagion. When portfolio rebalancing occurs in markets with information asymmetries, the resulting price movements are exaggerated because the orderflow is misconstrued as being information-based. The model is based on a two-period endowment economy with N risky assets and a riskless asset. Investors trade the assets in the first period and consume the liquidation value of all assets in the second period. The model includes three types of participants: informed investors, uninformed investors, and noise traders. Informed investors have superior information about the liquidation value of the assets, while noise traders buy and sell assets based on their own idiosyncratic need for liquidity. The model shows that contagion can occur in the absence of public news and between countries that do not directly share common macroeconomic fundamentals. The model also illustrates how contagion can occur through cross-market rebalancing, where investors respond to shocks in one market by rebalancing their portfolios in other markets. The model provides a possible explanation for the contagion observed between countries with different macroeconomic fundamentals. It also shows that differences in information asymmetries between developed and emerging markets may explain why emerging markets were hit hard by contagion while developed markets remained relatively unscathed. The model highlights the role of macroeconomic fundamentals in determining the pattern of contagion and provides insights into the transmission of market turbulence between countries.