A liquidity cascade occurs when a decrease in liquidity leads to a rapid and widespread sell-off of assets.
In a liquidity cascade, investors may begin to sell off assets not directly affected by the liquidity shortage, which can cause a domino effect and further exacerbate the crisis. This can lead to a vicious cycle, where falling asset values lead to more selling, which in turn causes further declines in value.
Liquidity cascades can significantly impact the broader economy, leading to widespread financial instability, credit freezes, and even bank failures.