Learning from history: volatility and financial crises
Danielsson, J.
, Valenzuela, M. & Zer, I.
(2016).
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.
(2016).
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 volatility on the probability of financial crises by constructing a cross-country database spanning 211 years. We find that volatility is not a significant predictor of crises whereas unexpected high and low volatilities are. Low volatility leads to banking crises and both high and low volatilities make stock market crises more likely, while volatility in any form has little impact on currency crises. The volatility-crisis relationship becomes stronger when financial markets are more prominent and less regulated. Finally, low-risk environments are conducive to greater buildup of risk-taking, providing empirical support for the Minsky hypothesis.