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The Propagation of Financial Extremes: An Application to Subprime Market Spillovers

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  • Chollete, Lorán

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

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    Abstract

    What drives extreme and rare economic events? Motivated by recent theory, and events in US subprime markets, we begin to open the black box of extremes. Specifically, we build a taxonomy of extremes, then extend standard economic analysis of extreme risk. First, we model the potentially relevant dimensions of dynamics and endogeneity. In characterizing individuals' endogenous propagation of extremes, we relate the latter to public goods. Second, using over a century of daily stock price data, we construct empirical probabilities of extremes. We document that extremes are relatively frequent and persistent. We find evidence that extremes are endogenous, raising the possibility that control of extremes is a public good.

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    Bibliographic Info

    Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2008/2.

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    Length: 58 pages
    Date of creation: 31 Jan 2008
    Date of revision:
    Handle: RePEc:hhs:nhhfms:2008_002

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    Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
    Phone: +47 55 95 92 93
    Fax: +47 55 95 96 50
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    Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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    Keywords: Extreme event; Subprime Market; Dynamics; Endogeneity; Public Good;

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