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Learning from History : Volatility and Financial Crises

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  • Jon Danielsson
  • Marcela Valenzuela
  • Ilknur Zer

Abstract

We study the effects of volatility on financial crises by constructing a cross-country database spanning over 200 years. Volatility is not a significant predictor of crises whereas unusually high and low volatilities are. Low volatility is followed by credit build-ups, indicating that agents take more risk in periods of low financial risk consistent with Minsky hypothesis, and increasing the likelihood of a banking crisis. The impact is stronger when financial markets are more prominent and less regulated. Finally, both high and low volatilities make stock market crises more likely, while volatility in any form has no impact on currency crises.

Suggested Citation

  • Jon Danielsson & Marcela Valenzuela & Ilknur Zer, 2016. "Learning from History : Volatility and Financial Crises," Finance and Economics Discussion Series 2016-093, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2016-93
    DOI: 10.17016/FEDS.2016.093
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    Cited by:

    1. Nikolay Hristov & Markus Roth, 2019. "Uncertainty Shocks and Financial Crisis Indicators," CESifo Working Paper Series 7839, CESifo Group Munich.
    2. Quast, Josefine & Wolters, Maik H., 2019. "Reliable real-time output gap estimates based on a modified Hamilton filter," IMFS Working Paper Series 133, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    3. repec:bla:ehsrev:v:71:y:2018:i:2:p:480-505 is not listed on IDEAS
    4. repec:rfe:zbefri:v:37:y:2019:i:1:p:113-138 is not listed on IDEAS
    5. Basak, Deepal & Murray, Alexander & Zhao, Yunhui, 2017. "Does Financial Tranquility Call for More Stringent Regulation?," MPRA Paper 81373, University Library of Munich, Germany.
    6. Gabriele Galati & Richhild Moessner, 2018. "What Do We Know About the Effects of Macroprudential Policy?," Economica, London School of Economics and Political Science, vol. 85(340), pages 735-770, October.
    7. Danielsson, Jon & Macrae, Robert & Tsomocos, Dimitrios P. & Zigrand, Jean-Pierre, 2016. "Why macropru can end up being procyclical," LSE Research Online Documents on Economics 70711, London School of Economics and Political Science, LSE Library.
    8. Iori, G. & Gurgone, A., 2019. "A multi-agent methodology to assess the effectiveness of alternative systemic risk adjusted capital requirements," Working Papers 19/05, Department of Economics, City University London.
    9. repec:nbb:ecrart:y:2018:m:december:i:iv:p:107-124 is not listed on IDEAS

    More about this item

    Keywords

    Stock market volatility; Financial crises predictability; Volatility paradox; Minsky hypothesis; Financial instability; Risk-taking;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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