Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of Empirical Indicators
AbstractThere are several types of risk aversion indicators used by financial institutions. These indicators, which are estimated in diverse ways, often show differing developments, although it is not possible to directly assess which is the most appropriate. Here, we consider the most well-known of these indicators and construct others with standard methods. As financial crises generally coincide with periods in which risk aversion increases, we try to check if these indicators rise just before the crises and also if they are able to forecast crises. We estimate logit and multilogit models of financial crises - exchange rate and stock market crises - using control variables and each of the risk aversion indicators. In-sample simulations allow us to assess their respective predictive powers. Risk aversion indicators are found to be good leading indicators of stock market crises, but less so for currency crises.
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Bibliographic InfoPaper provided by CEPII research center in its series Working Papers with number 2007-02.
Date of creation: Jan 2007
Date of revision:
Models; Financial markets; Crisis;
Other versions of this item:
- Coudert, Virginie & Gex, Mathieu, 2008. "Does risk aversion drive financial crises? Testing the predictive power of empirical indicators," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 167-184, March.
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-09 (All new papers)
- NEP-MAC-2007-04-09 (Macroeconomics)
- NEP-RMG-2007-04-09 (Risk Management)
- NEP-UPT-2007-04-09 (Utility Models & Prospect Theory)
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