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Tackling the volatility paradox: spillover persistence and systemic risk

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  • Kubitza, Christian

Abstract

Financial losses can have persistent effects on the financial system. This paper proposes an empirical measure for the duration of these effects, Spillover Persistence. I document that Spillover Persistence is strongly correlated with financial conditions; during banking crises, Spillover Persistence is higher, whereas in the run-up phase of stock market bubbles it is lower. Lower Spillover Persistence also associates with a more fragile system, e.g., a higher probability of future crises, consistent with the volatility paradox. The results emphasize the dynamics of loss spillovers as an important dimension of systemic risk and financial constraints as a key determinant of persistence. JEL Classification: E44, G01, G12, G20, G32

Suggested Citation

  • Kubitza, Christian, 2024. "Tackling the volatility paradox: spillover persistence and systemic risk," Working Paper Series 2981, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242981
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    More about this item

    Keywords

    asset price bubbles; financial crises; fire sales; fragility; systemic risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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