Learning from history: volatility and financial crises

Jon Danielsson, Marcela Valenzuela and Ilknur Zer

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study the effects of volatility on the probability of financial crises by constructing a cross-country database spanning 211 years. We find that volatility is not a significant predictor of crises whereas unexpected high and low volatilities are. Low volatility leads to banking crises and both high and low volatilities make stock market crises more likely, while volatility in any form has little impact on currency crises. The volatility-crisis relationship becomes stronger when financial markets are more prominent and less regulated. Finally, low-risk environments are conducive to greater buildup of risk-taking, providing empirical support for the Minsky hypothesis.

Keywords: Stock market volatility; financial crises predictability; volatility paradox; minsky hypothesis; financial instability; risk taking (search for similar items in EconPapers)
JEL-codes: F30 G10 G18 N10 N20 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-02-15
New Economics Papers: this item is included in nep-fmk and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://eprints.lse.ac.uk/66046/ Open access version. (application/pdf)

Related works:
Journal Article: Learning from History: Volatility and Financial Crises (2018)
Working Paper: Learning from history: volatility and financial crises (2018)
Working Paper: Learning from history: volatility and financial crises (2018)
Working Paper: Learning from History: Volatility and Financial Crises (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:66046

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