Learning from History: Volatility and Financial Crises

   Daníelsson, J., M. Valenzuela, and I. Zer (2018, January). Learning from history: Volatility and financial crises. Review of Financial Studies Forthcoming.

Download paper
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.''

 author =  {J{\'o}n Dan{\'\i}elsson and Marcela Valenzuela and Ilknur
 title =   {Learning from History: Volatility and Financial Crises},
 journal = "Review of Financial Studies",
 volume =  {Forthcoming},
 year =    2018,
 url =     {RiskResearch.org},