IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Chollete, Lorán

    ()

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

Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://hdl.handle.net/11250/163944
    Download Restriction: no

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

    as
    in new window

    Length: 58 pages
    Date of creation: 31 Jan 2008
    Date of revision:
    Handle: RePEc:hhs:nhhfms:2008_002
    Contact details of provider: 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
    Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspxEmail:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
    2. Ibragimov, Rustam & Walden, Johan, 2007. "The limits of diversification when losses may be large," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2551-2569, August.
    3. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    4. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 0204, European Central Bank.
    5. Chichilnisky, Graciela & Wu, Ho-Mou, 2006. "General equilibrium with endogenous uncertainty and default," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 499-524, August.
    6. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-92, May.
    7. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," The Journal of Business, University of Chicago Press, vol. 61(3), pages 275-98, July.
    8. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2007. "The age of reason: financial decisions over the lifecycle," Working Paper Series WP-07-05, Federal Reserve Bank of Chicago.
    9. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
    10. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
    11. Granger, C. W. J. & White, Halbert & Kamstra, Mark, 1989. "Interval forecasting : An analysis based upon ARCH-quantile estimators," Journal of Econometrics, Elsevier, vol. 40(1), pages 87-96, January.
    12. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    13. Chichilnisky, Graciela, 2000. "An axiomatic approach to choice under uncertainty with catastrophic risks," Resource and Energy Economics, Elsevier, vol. 22(3), pages 221-231, July.
    14. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    15. Chichilnisky, Graciela, 2009. "The topology of fear," Journal of Mathematical Economics, Elsevier, vol. 45(12), pages 807-816, December.
    16. Rabin, Matthew, 2000. "Inference by Believers in the Law of Small Numbers," Department of Economics, Working Paper Series qt4sw8n41t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    17. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    18. Ibragimov, Rustam & Walden, Johan, 2007. "The limits of diversification when losses may be large," Scholarly Articles 2624460, Harvard University Department of Economics.
    19. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    20. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-63, December.
    21. Lorán Chollete & Randi Næs & Johannes A. Skjeltorp, 2007. "What captures liquidity risk? A comparison of trade and order based liquidity factors," Working Paper 2007/03, Norges Bank.
    22. Sheard Paul, 1994. "Reciprocal Delegated Monitoring in the Japanese Main Bank System," Journal of the Japanese and International Economies, Elsevier, vol. 8(1), pages 1-21, March.
    23. Rustam Ibragimov & Johan Walden, 2006. "The Limits of Diversification When Losses May Be Large," Harvard Institute of Economic Research Working Papers 2104, Harvard - Institute of Economic Research.
    24. King, Gary & Zeng, Langche, 2001. "Explaining Rare Events in International Relations," International Organization, Cambridge University Press, vol. 55(03), pages 693-715, June.
    25. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range-Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, 06.
    26. Andrey Pavlov & Susan M. Wachter, 2006. "The Inevitability of Marketwide Underpricing of Mortgage Default Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(4), pages 479-496, December.
    27. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    28. Domowitz, Ian & Hansch, Oliver & Wang, Xiaoxin, 2005. "Liquidity commonality and return co-movement," Journal of Financial Markets, Elsevier, vol. 8(4), pages 351-376, November.
    29. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
    30. Richard Herring & Susan Wachter, . "Bubbles in Real Estate Markets," Zell/Lurie Center Working Papers 402, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    31. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
    32. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
    33. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:hhs:nhhfms:2008_002. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stein Fossen)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.