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Learning from history: volatility and financial crises

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

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Identification Number: 10.1093/rfs/hhy049

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
Sets: Departments > Finance
Date Deposited: 10 Dec 2018 11:50
Last Modified: 20 Oct 2019 00:21
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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