Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2008/2:
The Propagation of Financial Extremes: An Application to Subprime Market Spillovers
Lorán Chollete ()
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; (follow links to similar papers)
JEL-Codes: C10; E44; E51; H23; H41; (follow links to similar papers)
58 pages, January 31, 2008
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