Learning from History: Volatility and Financial Crises

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: 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