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  • April 2022
  • Article
  • Journal of Finance

Predictable Financial Crises

By: Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen
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Abstract

Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.

Keywords

Financial Crisis; Global Range; Forecasting and Prediction; Mathematical Methods

Citation

Greenwood, Robin, Samuel G. Hanson, Andrei Shleifer, and Jakob Ahm Sørensen. "Predictable Financial Crises." Journal of Finance 77, no. 2 (April 2022): 863–921.

Supplemental Information

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Replication Kit
Internet Appendix
Internet Appendix
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About The Authors

Robin Greenwood

Finance
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Samuel G. Hanson

Finance
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Andrei Shleifer

Negotiation, Organizations & Markets
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More from the Authors
  • Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
  • The Disappearing Index Effect By: Robin Greenwood and Marco Sammon
  • Imagining the Future: Memory, Simulation and Beliefs about COVID By: Pedro Bordalo, Giovanni Burro, Katherine B. Coffman, Nicola Gennaioli and Andrei Shleifer
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