Risk research: Learning from History: Volatility and Financial Crises

Learning from History: Volatility and Financial Crises

Daníelsson, J., M. Valenzuela, and I. Zer (2018, January). Learning from history: Volatility and financial crises. Review of Financial Studies 31, 2774–2805.

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.''

@ARTICLE{DanielssonValenzuelaZer2015,
  author =  {J{\'o}n Dan{\'i}elsson and Marcela Valenzuela and Ilknur
                  Zer},
  title =   {Learning from History: Volatility and Financial Crises},
  journal = "Review of Financial Studies",
  volume =  {31},
  pages =   {2774-2805},
  year =    2018,
  url =     {ssrn.com/abstract=2872651},
 }

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