A category of financial risk that arises from the interaction of market participants. It is created endogenously (as opposed to exogenous risk) due to a source of volatility that cannot be explained and attributed to specific factors. In other words, this risk is created by non-fundamental factors. Influences or shocks that initiate from outside the financial system or a specific marketplace are exogenous risks, such as market participants’ reaction to external developments such as news events which can potentially exacerbate the impact of such development by the very reaction of a market player (e.g., when market participants go on selling, prices start to fall, triggering further selling, etc.)
Endogenous risks represent the attempts of a market player to outsmart or restrict the expectations of other players, leading to a sort of volatility for which no pricing model is available and hence inherently features non-linearity (broadly known as beauty pageant risks). Examples include a market participant’s reaction to support or resistance. Likewise
Endogenous risk was identified and proposed by Jon Danielsson and Hyun-Song Shin in 2002.
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