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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. Erik Kole’s dissertation provides answers to these questions from an investor’s perspective. The main conclusion of this thesis 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. 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.

Full text of the dissertation.

Radio Interview

On Thursday June 22nd, I was interviewed by Rene de Monchy from the Dutch radio station BNR on my dissertation. From the interview of about 12 minutes, approximately 3 minutes have been regularly broadcasted on Friday. Listen to the radio interview.