On Crises, Crashes and Comovements

Crises and crashes in financial markets are investors’ worst fear. The combination of large losses, a persistent increase of price fluctuations, and a strengthening of comovements in prices causes investors great harm. While the severe consequences of crises and crashes are intuitively clear, many essential questions regarding the magnitude of the effects on specific fields in finance and the precise impact of the different factors have yet to be resolved. This dissertation provides answers to these questions from an investor’s perspective. Its main conclusion reads that the tendency of crises and crashes to spread to other assets and markets as well as over time is of crucial importance for determining their impact. Traditional models for comovements underestimate the risk of joint downward movements. Persistence exacerbates the effects of a crisis and increases the costs of ignoring its possibility beforehand. Moreover, this thesis concludes that investors can expect a compensation for the grave consequences of a crash that they are unable to evade. The size of this compensation indicates that crash risk may be equally important as the traditional risk in the normal fluctuations of asset prices. Furthermore, predictions on the likelihood of a crash can be improved by studying past returns. Besides these empirical contributions, this dissertation shows how various econometric techniques, including copulas and regime-switching models, can be used innovatively for the examination of crises, crashes and comovements.

Erik Kole was born in Valkenswaard on July 18, 1978. He attended the Hertog Jan College(Scholengemeenschap Were Di) in Valkenswaard, at which he obtained a Gymnasium diploma with distinction in 1996. From 1996 to 2001 Erik studied Econometrics at Maastricht University. He wrote his Master's thesis titled Hedging Basket Options based on an internship at Fortis Bank Investment Banking during the academic year 2000/2001. In 2001 he received his Master's degree with distinction. In September 2001 he joined the Financial Management Department of the Rotterdam School of Management (RSM) at Erasmus University Rotterdam as a PhD-student and became assistant professor as of September 2005. His PhD-track was supported by the Erasmus Research Institute of Management (ERIM). He presented parts of his research at several international conferences and seminars, including the 2005 meeting of the European Finance Association in Moscow. The article version of Chapter 3 of his dissertation is accepted for publication in the Journal of Banking & Finance. His teaching experience include Bachelor courses in the (International) Business Administration Program of RSM Erasmus University. Currently, Erik is working for the Econometric Institute of the Erasmus School of Economics and Business Economics at Erasmus University Rotterdam as a postdoctoral researcher and assistant professor. His research interests focus on risk management, asset pricing and ¯nancial econometrics.