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. Systemic Risk Centre Discussion Papers (57). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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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:	Monograph (Discussion Paper)
Official URL:	https://www.systemicrisk.ac.uk/
Additional Information:	© 2018 The Author(s)
Divisions:	Finance Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
Date Deposited:	03 Jul 2023 12:27
Last Modified:	01 Oct 2024 03:20
URI:	http://eprints.lse.ac.uk/id/eprint/118942

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