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112:. Shown in the figure on the right, as a financial asset enters into a bubble state, followed by a crash, perceived risk reported by typical risk measures, falls as the bubble builds up, sharply increasing after the bubble deflates. By contrast, actual risk increases along with the bubble, falling at the same time the bubble bursts. Perceived risk and actual risk are negatively correlated. The phenomenon is often explained by use of Danielsson's dam metaphor.
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65:. Market participants react to these shocks, but have no influence over them. By contrast, endogenous risk is risk stemming from the behaviour of participants within the financial system, such as when positive economic outlooks cause innovation of new financial products, increased leverage, and speculation; these self-reinforcing processes feed on each other to increase risk. Such endogenous factors,
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A dam is a good illustration of actual and perceived risk. Before the dam breaks, risk is perceived as low, and we leave the dam as it is. After the dam breaks, risk is perceived as high, and we institute crisis measures. The endogenous or actual risk in the system is the opposite of the perceived
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risk: when tensions build up before the dam breaks, actual or endogenous risk in the system is high and growing, amplified by self-reinforcing weaknesses. After the dam has broken, actual or endogenous risk in the system is low.
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Risk can be classified into the two categories of exogenous and endogenous. Exogenous risk is risk stemming from factors outside the financial system, such as
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As a practical interpretation of endogenous risk when applied to risk measurements, it can be further subdivided into
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that is created by the interaction of market participants internal to the financial system. It was proposed by
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Danielsson, J.; Shin, H. S.; Zigrand, J. P. (2012). "Endogenous extreme events and the dual role of prices".
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Danı́elsson, Jón; Shin, Hyun Song; Zigrand, Jean-Pierre (2004-05-01).
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what is reported by common risk measurement techniques, such as
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