Volker Wieland, Christos Koulovatianos, 01 November 2011

A stock-market collapse such as the one after the 2008 Lehman Brothers default is followed by more pessimistic assessments of the likelihood of future collapses in surveys and by lower price-dividend ratios. This column argues this reaction of expectations and asset prices can be explained by Bayesian decision theory. The key is to appreciate that market participants know little about the drivers of such crashes. They revise their beliefs and learn over time.

Assaf Razin, Galina Hale, 08 August 2009

Finding reliable indicators that predict the likelihood and severity of crises across countries has been a frustrating quest for economists. This column suggests that countries with better creditor protection suffer less when a crisis hits.

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