The Propagation of Financial Extremes: An Application to Subprime Market Spillovers

Lorán Chollete ()
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Lorán Chollete: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

No 2008/2, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: What drives extreme and rare economic events? Motivated by recent theory, and events in US subprime markets, we begin to open the black box of extremes. Specifically, we build a taxonomy of extremes, then extend standard economic analysis of extreme risk. First, we model the potentially relevant dimensions of dynamics and endogeneity. In characterizing individuals' endogenous propagation of extremes, we relate the latter to public goods. Second, using over a century of daily stock price data, we construct empirical probabilities of extremes. We document that extremes are relatively frequent and persistent. We find evidence that extremes are endogenous, raising the possibility that control of extremes is a public good.

Keywords: Extreme event; Subprime Market; Dynamics; Endogeneity; Public Good (search for similar items in EconPapers)
JEL-codes: C10 E44 E51 H23 H41 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2008-01-31
New Economics Papers: this item is included in nep-fmk, nep-mac, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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