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

Author

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  • Chollete, Lorán

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

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.

Suggested Citation

  • Chollete, Lorán, 2008. "The Propagation of Financial Extremes: An Application to Subprime Market Spillovers," Discussion Papers 2008/2, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2008_002
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    File URL: http://hdl.handle.net/11250/163944
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    Cited by:

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    More about this item

    Keywords

    Extreme event; Subprime Market; Dynamics; Endogeneity; Public Good;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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