The Impact of Risk Cycles on Business Cycles: A Historical View
Download paperWe investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.
@ARTICLE{DanielssonValenzuelaZer2020, author = {J{\'o}n Dan{\'i}elsson and Marcela Valenzuela and Ilknur Zer}, title = {The Impact of Risk Cycles on Business Cycles: A Historical View}, journal = "Review of Financial Studies", year = 2023, url = {papers.ssrn.com/sol3/papers.cfm?abstract_id =4227577}, }
Risk research
Jon Danielson's research papers on systemic risk, artificial intelligence, risk forecasting, financial regulations and crypto currencies.© All rights reserved, Jon Danielsson,