Template-Type: ReDIF-Paper 1.0
Author-Name: Kole, H.J.W.G.
Author-Name-Last: Kole
Author-Name-First: Erik
Author-Person: pko187
Author-Name: Koedijk, C.G.
Author-Name-Last: Koedijk
Author-Name-First: Kees
Author-Name: Verbeek, M.J.C.M.
Author-Name-Last: Verbeek
Author-Name-First: Marno
Author-Person: pve266
Title: The effects of systemic crises when investors can be crisis ignorant
Abstract: Systemic crises can largely affect asset allocations due to the rapid deterioration of the risk-return trade-off. We investigate the effects of systemic crises, interpreted as global simultaneous shocks to financial markets, by introducing an investor adopting a crisis ignorant or crisis conscious strategy. Including the possibility of a systemic crisis is a substantial improvement. Investments in risky assets fall, while allocations to countries less sensitive to a crisis grow relatively. An increasing probability of a crisis exacerbates these effects. The certainty equivalent costs of ignoring systemic crises are large, ranging from 0.65% per year unconditionally, to over 5% per month conditionally on a high probability for the occurrence of a crisis.
Creation-Date: 2004-04-17
File-URL: https://repub.eur.nl/pub/1270/ERS%202004%20027%20F&A.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2004-027-F&A
Classification-JEL: C51, F30, G01, G11, G15, G3, M, M41
Keywords: asset allocation, international finance, regime switching, systemic risk
Handle: RePEc:ems:eureri:1270