Learning from history: volatility and financial crises

Danielsson, Jon ORCID: 0009-0006-9844-7960, Valenzuela, Marcela and Zer, Ilknur (2018) Learning from history: volatility and financial crises. Review of Financial Studies, 31 (7). 2774 - 2805. ISSN 0893-9454

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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."

Item Type:	Article
Official URL:	https://academic.oup.com/rfs
Additional Information:	© 2018 Society for Financial Studies
Divisions:	Finance
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HG Finance
JEL classification:	F - International Economics > F3 - International Finance > F30 - General F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance G - Financial Economics > G0 - General G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation N - Economic History > N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations > N10 - General, International, or Comparative N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative
Date Deposited:	10 Dec 2018 11:50
Last Modified:	18 Feb 2025 22:14
Projects:	11140541, IS130002, ES/K002309/1
Funders:	Fondecyt Project, Instituto Milenio ICM, Economic & Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/91136

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