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Learning from history: volatility and financial crises

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  • Danielsson, Jon
  • Valenzuela, Marcela
  • Zer, Ilknur

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."

Suggested Citation

  • Danielsson, Jon & Valenzuela, Marcela & Zer, Ilknur, 2018. "Learning from history: volatility and financial crises," LSE Research Online Documents on Economics 91136, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:91136
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    More about this item

    Keywords

    stock market volatility; �financial crises predictability; volatility paradox; Minsky hypothesis; financial instability; risk-taking; ES/K002309/1;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G0 - Financial Economics - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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