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

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  • Camille Cornand

    () (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)

  • Céline Gimet

    (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Camille Cornand & Céline Gimet, 2012. "The 2007-2008 financial crisis: Is there evidence of disaster myopia?," Post-Print halshs-00617127, HAL.
  • Handle: RePEc:hal:journl:halshs-00617127
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00617127
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    References listed on IDEAS

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    Cited by:

    1. Díez-Esteban, José María & Farinha, Jorge Bento & García-Gómez, Conrado Diego, 2016. "The role of institutional investors in propagating the 2007 financial crisis in Southern Europe," Research in International Business and Finance, Elsevier, vol. 38(C), pages 439-454.
    2. Reddy, Kotapati Srinivasa, 2015. "The impact of the global financial crisis on border-crossing mergers and acquisitions: A continental/industry analysis," MPRA Paper 63563, University Library of Munich, Germany, revised 2015.
    3. Narendar Rao & K. Reddy, 2015. "The impact of the global financial crisis on cross-border mergers and acquisitions: a continental and industry analysis," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 309-341, December.
    4. repec:eee:finsta:v:29:y:2017:i:c:p:92-105 is not listed on IDEAS
    5. repec:clh:resear:v:8:y:2015:i:34 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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