Learning from History: Volatility and Financial Crises

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Danielsson, 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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