Learning from history: volatility and financial crises
Danielsson, J.
, Valenzuela, M. & Zer, I.
(2018).
Learning from history: volatility and financial crises.
(Systemic Risk Centre Discussion Papers 57).
Systemic Risk Centre, The London School of Economics and Political Science.
, Valenzuela, M. & Zer, I.
(2018).
Learning from history: volatility and financial crises.
(Systemic Risk Centre Discussion Papers 57).
Systemic Risk Centre, The London School of Economics and Political Science.
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."