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The impact of leverage volatility on risk: A tug-of-war between amplification and attenuation effects

Author

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  • Zheng, Zhiyong
  • Hunjra, Ahmed Imran
  • Alawi, Suha Mahmoud
  • Yang, Xiaodong

Abstract

This study employs a novel time-varying forecast error variance decomposition framework based on the TVP-VAR model to investigate the risk dynamics triggered by leverage volatility. The results reveal a tug-of-war between amplification and attenuation effects within the cross-sectoral spillover network. Specifically, real estate and foreign exchange markets exhibit the highest sensitivity to leverage volatility shocks across other sectors during different phases of the economic cycle. Stock and real estate markets serve as key risk transmission channels, while the foreign exchange and bond markets exhibit the highest net spillover effects. Under leverage volatility, the real estate market has evolved into a core hub for systemic risks, closely linked to risks in other industries. Government leverage activities significantly amplify the financial risks borne by the public sector itself, while heterogeneous deleveraging policies can change the core sector attributes that drive systemic risks. This study provides policymakers with precise insights to mitigate leverage and systemic financial risks, contributing to the literature by integrating endogenous market dynamics with exogenous policy shocks within a dynamic spillover framework.

Suggested Citation

  • Zheng, Zhiyong & Hunjra, Ahmed Imran & Alawi, Suha Mahmoud & Yang, Xiaodong, 2026. "The impact of leverage volatility on risk: A tug-of-war between amplification and attenuation effects," Research in International Business and Finance, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:riibaf:v:87:y:2026:i:c:s0275531926001510
    DOI: 10.1016/j.ribaf.2026.103424
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