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Title: Sudden Spikes in Global Risk

Author(s): Philippe Bacchetta and Eric van Wincoop

Publication Date: February 2012

Keyword(s): contagion and international finance

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: Recent episodes (October 2008, May 2010, August 2011) have witnessed huge spikes in equity price risk (implied volatility). Apart from their large size, several features characterize these risk panics. They are global phenomena, shared among a broad set of countries. There is substantial variation though in the extent to which individual countries are impacted, while the impact bears little relation to financial linkages with the epicenter of the crisis. In addition there is usually not a large shock to fundamentals that sets off these panics. We provide an explanation for these risk panic features in the context of a two-country model that allows for self-fulfilling shifts in risk.

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Bibliographic Reference

Bacchetta, P and van Wincoop, E. 2012. 'Sudden Spikes in Global Risk'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8853