Volatility as a Transmitter of Systemic Risk: Is there a Structural Risk in Finance?

This article discusses the role of volatility in the context of systemic risk in finance. The main argument is that volatility transmits risks within the financial system and beyond, shaking the financial system and threatening in particular small or vulnerable clients (SMEs, households, and also low- and middle-income countries). In addition, it is argued that volatility-induced threats result from structural characteristics of the financial markets themselves (reactivity, reflexivity, and recursivity). The article introduces the concept of volatility, and different approaches to understanding risks related to the financial system (e.g., financial analysis, systems analysis). Two cases related to systemic risk are presented. The first concerns the role of volatility in three major financial crises (stock crash 1987, Asian crisis 1996-1997, global banking crisis 2007-2008), documenting that volatility spillovers have become a "new normal." The second case concerns the moderate reflection of systemic risk within The Journal of Finance (the leading financial journal). The two cases show that volatility plays a role in systemic risks, but that this role has not yet been examined in detail by the scientific community.