Title: Financial crises, crisis spillovers and the business cycle
Abstract: Financial crises typically occur both during economic recessions and expansions. The objective of this paper is to quantify the likelihood of financial crises and crisis spill-overs across the business cycle in order to assess whether and to what extent economic recession episodes are more inclined towards financial crises and crisis co-movements than expansion periods. Statistical extreme value analysis (EVT) is put at work to calculate these marginal and joint tail likelihoods for recessions and expansion subsamples. We find that tail risk is procyclical for different types of financial assets. Also, systemic risk indicators based on extreme co-movements between bank stocks are found to be procyclical which confirms earlier research on market-based systemic risk measures. Moreover, cross-asset crisis spillovers like flight-to-quality effects between stocks, bonds or gold become much more pronounced during recessions. Finally, we show that diversifying portfolio tail risk becomes more difficult during recessions. To our knowledge, applying EVT techniques to business cycle regimes (or other economically meaningful sample partitions) is novel to the literature on financial extremes and extreme value analysis. EVT measures can also be made dependent on multiple regimes and regime determination can be made endogenous.