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The 2007-2008 financial crisis: Is there evidence of disaster myopia?

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  • Camille Cornand

    (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)

  • Céline Gimet

    (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)

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    Abstract

    The disaster myopia hypothesis is a theoretical argument that may explain why crises are a recurrent event. Under very optimistic circumstances, investors disregard any relevant information concerning the increasing degree of risk. Agents' propensity to underestimate the probability of adverse outcomes from the distant past increases the longer the period since that event occurred and at some point the subjective probability attached to this event reaches zero. This risky behaviour may contribute to the formation of a bubble that bursts into a crisis. This paper tests whether there is evidence of disaster myopia during the recent episode of financial crisis in the banking sector. Its contribution is twofold. First, it shows that the 2007 financial crisis exhibits disaster myopia in the banking sector. And second, it identifies macro and specific determinant variables in banks' risk taking since the beginning of the years 2000.

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    File URL: http://halshs.archives-ouvertes.fr/docs/00/61/71/27/PDF/1125.pdf
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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number halshs-00617127.

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    Date of creation: 2012
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    Publication status: Published, Emerging Markets Review, 2012, 13, 3, pp. 301-315
    Handle: RePEc:hal:journl:halshs-00617127

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00617127
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    Related research

    Keywords: disaster myopia; financial crisis; banks; risk taking dynamics; GMM;

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