Endogenous Risk

Endogenous risk refers to risks that originate within the financial system, often due to the actions, behaviors, or decisions of market participants. Unlike external or exogenous risks, such as natural disasters or geopolitical events, endogenous risks are created by factors like market feedback loops, herd behavior, leverage, and liquidity mismatches. These risks can amplify market volatility and cause systemic crises, as they are generated and exacerbated by the financial system itself.

Example

The 2008 financial crisis is an example of endogenous risk, where excessive leverage and interconnectedness within the banking sector led to a systemic collapse.