This paper develops a rational expectations model of asset prices to explain financial market contagion, focusing on cross-market rebalancing. The model allows for contagion through multiple channels, but the analysis centers on how investors transmit idiosyncratic shocks across markets by adjusting their portfolios to shared macroeconomic risks. The severity and pattern of financial contagion depend on the sensitivity of markets to shared macroeconomic risk factors and the amount of information asymmetry in each market. The model can generate contagion even without news and between markets that do not share common macroeconomic fundamentals. The introduction highlights recent financial crises and the uneven pattern of comovement among financial markets, particularly in emerging economies. The paper aims to explain this pattern using a rational expectations model, which is designed to describe short-term asset price movements. The model nests various channels for contagion, including correlated information and liquidity shocks, but focuses on cross-market rebalancing as a new channel. The general model is a two-period endowment economy with multiple risky assets and a riskless asset. Investors are categorized into informed, uninformed, and noise traders, each with different information and trading behaviors. The model's equilibrium prices are derived, and the conditions for contagion are analyzed. Contagion occurs when shocks in one market affect prices in others, and the model shows that it can be driven by both information and liquidity shocks. The paper explores the economic environment's impact on contagion channels, particularly the role of information asymmetry and country-specific factors. A stylized example with three countries illustrates how shocks can spread through cross-market rebalancing, even when countries do not share common macroeconomic factors. The example demonstrates that emerging markets can be particularly vulnerable to contagion due to higher information asymmetry, while developed markets may act as conduits for contagion among emerging markets.This paper develops a rational expectations model of asset prices to explain financial market contagion, focusing on cross-market rebalancing. The model allows for contagion through multiple channels, but the analysis centers on how investors transmit idiosyncratic shocks across markets by adjusting their portfolios to shared macroeconomic risks. The severity and pattern of financial contagion depend on the sensitivity of markets to shared macroeconomic risk factors and the amount of information asymmetry in each market. The model can generate contagion even without news and between markets that do not share common macroeconomic fundamentals. The introduction highlights recent financial crises and the uneven pattern of comovement among financial markets, particularly in emerging economies. The paper aims to explain this pattern using a rational expectations model, which is designed to describe short-term asset price movements. The model nests various channels for contagion, including correlated information and liquidity shocks, but focuses on cross-market rebalancing as a new channel. The general model is a two-period endowment economy with multiple risky assets and a riskless asset. Investors are categorized into informed, uninformed, and noise traders, each with different information and trading behaviors. The model's equilibrium prices are derived, and the conditions for contagion are analyzed. Contagion occurs when shocks in one market affect prices in others, and the model shows that it can be driven by both information and liquidity shocks. The paper explores the economic environment's impact on contagion channels, particularly the role of information asymmetry and country-specific factors. A stylized example with three countries illustrates how shocks can spread through cross-market rebalancing, even when countries do not share common macroeconomic factors. The example demonstrates that emerging markets can be particularly vulnerable to contagion due to higher information asymmetry, while developed markets may act as conduits for contagion among emerging markets.