Learning from history: volatility and financial crises
Danielsson, J.
, Valenzuela, M. & Zer, I.
(2018).
Learning from history: volatility and financial crises.
Review of Financial Studies,
31(7), 2774 - 2805.
https://doi.org/10.1093/rfs/hhy049
, Valenzuela, M. & Zer, I.
(2018).
Learning from history: volatility and financial crises.
Review of Financial Studies,
31(7), 2774 - 2805.
https://doi.org/10.1093/rfs/hhy049
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."