Low Risk as a Predictor of Financial Crises

Posted: 6 Jun 2018 Last revised: 25 Jun 2020

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: 2018-05-09

Abstract

Reliable indicators of future financial crises are important for policymakers and practitioners. While most indicators consider an observation of high volatility as a warning signal, this column argues that such an alarm comes too late, arriving only once a crisis is already under way. A better warning is provided by low volatility, which is a reliable indication of an increased likelihood of a future crisis.

Suggested Citation

Danielsson, Jon and Valenzuela, Marcela and Zer, Ilknur, Low Risk as a Predictor of Financial Crises (2018-05-09). FEDS Notes No. 2018-05-09, Available at SSRN: https://ssrn.com/abstract=3187711 or http://dx.doi.org/10.17016/2380-7172.2169

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

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