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  low volatility is. Low volatility is followed by credit build-ups and increased balance sheet leverage in the financial system, indicating that agents take more risk in periods of low risk, and increasing the likelihood of a banking crisis. That is, stability in the system endogenously creates instability. Such impact is weaker in times of relatively strong financial regulations

Board of Governors of the Federal Reserve System
Wednesday, September 6, 2017 - 13:00 to 14:00
Sala de Consejo, Beauchef 851, floor 4 - Departamento de Ingeniería Industrial, Universidad de Chile