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Low risk as a predictor of financial crises Accessible Data
Figure 1: The relationship between volatility and financial crises. A flow chart shows that low volatility leads to an increase in the risk appetite. This in turn can increase lending on one hand, and makes issued loans riskier on the other hand. In time, loan defaults increase, leading to a banking crisis and high volatility.
Figure 2: Volatility as predictor of crises. A line chart plots a linear relationship between volatility and crises. X-axis is volatility, y-axis is the probability of crises, and an increasing line represents the view that increasing volatility means crises are more likely. This view is rejected by the data.
Figure 3: Low and high volatilities as predictors of crises. A line chart plots another possible relationship between volatility and crises. X-axis is de-trended volatility, y-axis is the probability of crises. On the left-hand side (volatility below trend), a solid decreasing line is plotted, on the right-hand side (volatility above trend), both a dashed increasing line (labeled as V shape) and a solid zero line (labeled as hockey stick shape) are plotted. The top of the V on the left is labeled "Low volatility; Strong evidence," and the top of the V on the right is labled "High volatility; Weak evidence."