The Effects of Systemic Crises When Investors Can Be Crisis Ignorant

58 Pages Posted: 26 Aug 2006

See all articles by Erik Kole

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM; Tinbergen Institute

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Kees C. G. Koedijk

Tilburg University - Department of Finance

Date Written: 17 2004 4,

Abstract

Systemic crises can largely affect asset allocations due to the rapid deterioration of the risk-return trade-off. We investigate the effects of systemic crises, interpreted as global simultaneous shocks to financial markets, by introducing an investor adopting a crisis ignorant or crisis conscious strategy. Including the possibility of a systemic crisis is a substantial improvement. Investments in risky assets fall, while allocations to countries less sensitive to a crisis grow relatively. An increasing probability of a crisis exacerbates these effects. The certainty equivalent costs of ignoring systemic crises are large, ranging from 0.65% per year unconditionally, to over 5% per month conditionally on a high probability for the occurrence of a crisis.

Keywords: asset allocation, systemic risk, international finance, regime switching

JEL Classification: M, M41, G3, G11, G15, F30, C51, G01

Suggested Citation

Kole, Erik and Verbeek, Marno and Koedijk, Kees G., The Effects of Systemic Crises When Investors Can Be Crisis Ignorant (17 2004 4,). ERIM Report Series Reference No. ERS-2004-027-F&A. Available at SSRN: https://ssrn.com/abstract=594966

Erik Kole (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 12 58 (Phone)

HOME PAGE: http://people.few.eur.nl/kole

ERIM

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3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

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HOME PAGE: http://people.few.eur.nl/kole

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

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