Sudden Spikes in Global Risk

Bacchetta, Philippe; van Wincoop, Eric

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Sudden Spikes in Global Risk

CEPR Discussion Paper No. DP8853

38 Pages Posted: 1 Mar 2012

See all articles by Philippe Bacchetta

Philippe Bacchetta

University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: February 2012

Abstract

Recent episodes (October 2008, May 2010, August 2011) have witnessed huge spikes in equity price risk (implied volatility). Apart from their large size, several features characterize these risk panics. They are global phenomena, shared among a broad set of countries. There is substantial variation though in the extent to which individual countries are impacted, while the impact bears little relation to financial linkages with the epicenter of the crisis. In addition there is usually not a large shock to fundamentals that sets off these panics. We provide an explanation for these risk panic features in the context of a two-country model that allows for self-fulfilling shifts in risk.

Keywords: contagion, international finance

JEL Classification: F30, G15

Suggested Citation: Suggested Citation

Bacchetta, Philippe and van Wincoop, Eric, Sudden Spikes in Global Risk (February 2012). CEPR Discussion Paper No. DP8853, Available at SSRN: https://ssrn.com/abstract=2013846