The typical fall of asset prices during crises and recessions implies that asset correlation is
strong during these events while not necessarily discernible during the boom phase of the
business cycle. Using insights from the malinvestment cycle theory, we show that this shift in
correlation is not just the result of an exogenous shock. It is also the consequence of risk
buildup induced by changes in macro-policy instruments and credit expansion during the
boom. We provide a model where the probability of a crash increases with specific changes …