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 stock market volatility on risk-taking and financial crises by constructing a cross-country database spanning up to 211 years and 60 countries. Prolonged periods of low volatility have strong in-sample and out-of-sample predictive power over the incidence of banking crises and can be used as a reliable crisis indicator, whereas volatility itself does not predict crises. Low volatility leads to excessive credit build-ups and balance sheet leverage in the financial system, indicating that agents take more risk in periods of low risk, supporting the dictum that "stability is destabilizing."

Keywords: stock market volatility; �financial crises predictability; volatility paradox; Minsky hypothesis; financial instability; risk-taking (search for similar items in EconPapers)
JEL-codes: F30 F4 G0 G10 G18 N10 N20 (search for similar items in EconPapers)
Date: 2018-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Published in Review of Financial Studies, 1, July, 2018, 31(7), pp. 2774 - 2805. ISSN: 0893-9454

Downloads: (external link)
http://eprints.lse.ac.uk/91136/ 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 (2016)
Working Paper: Learning from History: Volatility and Financial Crises (2016)
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:91136

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 ().