Learning from History: Volatility and Financial Crises

47 Pages Posted: 21 Nov 2016 Last revised: 3 Mar 2018

See all articles by Jon Danielsson

Jon Danielsson

London School of Economics - Systemic Risk Centre

Marcela Valenzuela

Pontificia Universidad Católica de Chile

Ilknur Zer

Board of Governors of the Federal Reserve System

Date Written: October, 2016

Abstract

We study the effects of volatility on financial crises by constructing a cross-country database spanning over 200 years. Volatility is not a significant predictor of crises whereas unusually high and low volatilities are. Low volatility is followed by credit build-ups, indicating that agents take more risk in periods of low financial risk consistent with Minsky hypothesis, and increasing the likelihood of a banking crisis. The impact is stronger when financial markets are more prominent and less regulated. Finally, both high and low volatilities make stock market crises more likely, while volatility in any form has no impact on currency crises.

Keywords: Stock market volatility, Financial crises predictability, Volatility paradox, Minsky hypothesis, Financial instability, Risk-taking

JEL Classification: F30, F44, G01, G10, G18, N10, N20

Suggested Citation

Danielsson, Jon and Valenzuela, Marcela and Zer, Ilknur, Learning from History: Volatility and Financial Crises (October, 2016). FEDS Working Paper No. 2016-93, FEDS Working Paper No. 2016-093, Available at SSRN: https://ssrn.com/abstract=2872651 or http://dx.doi.org/10.17016/FEDS.2016.093

Jon Danielsson (Contact Author)

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44.207.955.6056 (Phone)

HOME PAGE: http://www.riskreasearch.org

Marcela Valenzuela

Pontificia Universidad Católica de Chile ( email )

Vicuña Mackenna 4860
Santiago, R. Metropolitana 7520421
Chile

Ilknur Zer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,695
Abstract Views
7,436
rank
14,560
PlumX Metrics