The impact of risk cycles on business cycles: a historical view

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 investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.

Keywords: stock market volatility; uncertainty; monetary policy independance; financial instability; risk-taking; global financial cycles (search for similar items in EconPapers)
JEL-codes: F30 G15 G18 N10 N20 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-07-31
New Economics Papers: this item is included in nep-ban, nep-his and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Review of Financial Studies, 31, July, 2023, 36(7), pp. 2922 - 2961. ISSN: 0893-9454

Downloads: (external link)
http://eprints.lse.ac.uk/117384/ Open access version. (application/pdf)

Related works:
Journal Article: The Impact of Risk Cycles on Business Cycles: A Historical View (2023)
Working Paper: The impact of risk cycles on business cycles: a historical view (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:117384

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().