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},
}