Learning from History: Volatility and Financial Crises
Download paper webappendixDanielsson, J., M. Valenzuela, and I. Zer (2018, January). Learning from history: Volatility and financial crises. Review of Financial Studies 31, 2774-2805.
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.''
@article{DanielssonValenzuelaZer2015, title={Learning from History: Volatility and Financial Crises}, author={J{\'o}n Dan{\'i}elsson and Marcela Valenzuela and Ilknur Zer}, year=2018, month=jan, journal={Review of Financial Studies}, issue=7, pages={2774-2805}, volume={31}, url={https://ssrn.com/abstract=2872651}, 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.'' }, webappendix={www.ModelsandRisk.org/volatility-and-crises}, }
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