How can volatility spillovers lead to systemic risk?

Volatility spillovers between financial markets can lead to systemic risk, which is the potential for a shock in one market to spread throughout the entire financial system. This occurs when the turbulence in one market spills over into other markets, causing a chain reaction of potential defaults. For example, a sudden increase in the volatility of stock markets can lead to an increase in bond market volatility, which in turn can lead to an increase in bank lending rates and a decline in economic growth. Ultimately, these spillovers can lead to a systemic crisis that can have severe economic consequences. Managing systemic risk requires a comprehensive understanding of the underlying dynamics of volatility spillovers and their impact on the financial system.

This mind map was published on 16 May 2023 and has been viewed 71 times.