Predictable Financial Crises

Robin Greenwood; Samuel G. Hanson; Andrei Shleifer; Jakob Ahm Sørensen

doi:10.3386/w27396

Predictable Financial Crises

Robin Greenwood, Samuel G. Hanson, Andrei Shleifer & Jakob Ahm Sørensen

Working Paper 27396

DOI 10.3386/w27396

Issue Date June 2020

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.

Greenwood and Hanson gratefully acknowledge funding from the Division of Research at Harvard Business School. Sørensen gratefully acknowledges support from FRIC Center for Financial Frictions (grant no. DNRF102). We thank Matthew Baron, Xavier Gabaix, Jeremy Stein, Adi Sunderam, Emil Verner, and Wei Xiong as well as seminar participants at Harvard and Princeton for helpful comments, and Peggy Moreland for editorial assistance. We are grateful to Matthew Baron, Emil Verner, and Wei Xiong for generously sharing their data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Robin Greenwood
Robin Greenwood

This document contains a list of professional activities beyond my main employment at Harvard University. Please feel free to contact me with any questions about this disclosure statement.

Outside activities since 2008, paid and unpaid:

Academic Advisory Board, Martingale Asset Management (chairman) Consultant, Martingale Asset Management

AllianceBernstein, research presentation and consultation Capital structure consultation to two non-financial companies Associate Editor, Review of Financial Studies (unpaid) Editor, Review of Financial Studies (2014-present, unpaid)

Honoraria:

In 2014, the Brookings Institute paid me an honorarium for the working paper “Government Debt Management at the

Zero Lower Bound”

The Banco Central de Chile paid me an honorarium for the paper “Forward Guidance in the Yield Curve: Short Rates versus Bond Supply.”

No institution had any say on the content of these papers or on what I write.

Paid speeches and executive education:

HBS Investment Management Workshop (various years, since 2008) HBS Finance for Senior Executives (various years, unpaid before 2016) SanfordBernstein Research Conference

Robeco Q-Group Arrowstreet Capital Pyramis

Prudential

Windham Capital Management

Other:

Since September 2015, I have been a voting member on the Harvard University Committee on pensions. I do not do consulting work or make paid presentations to any investment managers employed or being considered by Harvard in this capacity.

As part of my work at Harvard Business School, I regularly write cases about hedge funds, investment managers, and their strategies. I receive no compensation from these managers for writing these cases, and the cases are not meant as endorsements of the managers or their strategies. I receive royalties (currently under $1500 per year) for cases I have written while employed at Harvard.
MARC RIS BibTeΧ

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