Monday, 2 April 2018

Low risk as a predictor of financial crises

a column by Jon Danielsson, Marcela Valenzuela and Ilknur Zer for VOX: CEPR’s Policy Portal

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.


Figure 1: The relationship between volatility and financial crises

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