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Learning from History: Volatility and Financial Crises

Jon Danielsson (), Marcela Valenzuela and Ilknur Zer

No 2016-093, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the effects of volatility on financial crises by constructing a cross-country database spanning over 200 years. Volatility is not a significant predictor of crises whereas unusually high and low volatilities are. Low volatility is followed by credit build-ups, indicating that agents take more risk in periods of low financial risk consistent with Minsky hypothesis, and increasing the likelihood of a banking crisis. The impact is stronger when financial markets are more prominent and less regulated. Finally, both high and low volatilities make stock market crises more likely, while volatility in any form has no impact on currency crises.

Keywords: Stock market volatility; Financial crises predictability; Volatility paradox; Minsky hypothesis; Financial instability; Risk-taking (search for similar items in EconPapers)
JEL-codes: F30 F44 G01 G10 G18 N10 N20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his and nep-rmg
Date: 2016-10
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http://www.federalreserve.gov/econresdata/feds/2016/files/2016093pap.pdf (application/pdf)

Related works:
Journal Article: Learning from History: Volatility and Financial Crises (2018) Downloads
Working Paper: Learning from history: volatility and financial crises (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-93

DOI: 10.17016/FEDS.2016.093

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