Question

4. What way does the credit crisis impact the volatility of the stock market?

Answer 1

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Received wisdom maintains that financial market volatility has a direct impact on the likelihood of a financial crisis.

Perhaps the best expression of this is Minsky’s (1982) hypothesis that economic agents observing low financial risk are induced to increase risk-taking, which in turn may lead to a crisis. This is the foundation of his famous statement that “stability is destabilising”.

More recently, this sentiment has been echoed by policymakers:

“Volatility in markets is at low levels, both actual and expected…  to the extent that low levels of volatility may induce risk-taking behavior is a concern to me and to the Committee”
Federal Reserve Chair Janet Yellen, 18 June 2014.
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