Tackling the Volatility Paradox : Persistence and Systemic Risk

Macro-finance theory predicts that financial fragility builds up when volatility is low. This "volatility paradox" challenges traditional systemic risk measures. I explore a new dimension of systemic risk, spillover persistence, which is the average time horizon at which a firm's losses increase future risk in the financial system. Using firm-level data covering more than 30 years and 50 countries, I document that persistence declines when fragility builds up: before crises, during stock market booms, and when banks take more risks. In contrast, persistence increases with loss amplification: during crises and fire sales. These findings support key predictions of recent macro-finance models