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.

Additional Metadata
Keywords Asset Allocation, Asset Pricing, Bubbles, Copulas, Dependence, Diversification, Financial Crises, Regime Switching Models, Risk Management, Systemic Risk
JEL Financial Crises (jel G01), Corporate Finance and Governance (jel G3), Financing Policy; Capital and Ownership Structure (jel G32), Business Administration and Business Economics; Marketing; Accounting (jel M)
Promotor C.G. Koedijk (Kees) , M.J.C.M. Verbeek (Marno)
Publisher Erasmus University Rotterdam , Erasmus Research Institute of Management
Sponsor Prof.Dr. Ph.H.B.F. Franses Prof.Dr. P.C. Schotman Dr. R.J. Mahieu
ISBN 978-90-5892-114-7
Persistent URL hdl.handle.net/1765/7829
Series ERIM Ph.D. Series Research in Management
Citation
Kole, H.J.W.G. (2006, June 23). On Crises, Crashes and Comovements (No. 83). ERIM Ph.D. Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/7829