Too much time in a low risk environment will lead to a bad economic outcome

The pro-cyclical performance of risky assets is well known. It is assumed that asset returns are more volatile, risky, during economic downturns; however, the behavior of risk through time is distinct from the business cycle. The business cycle and risk cycle will not always overlap. By risk cycle we mean the longer-term trend in volatility. The risk cycle may create conditions that will lead to market downturns. Hence, an investor should separate the risk and business cycle and think of them as generating two different signals. As important as the level and change in volatility is the duration of time spent in a low volatility environment. 

Research finds that perceived time spent in a low-risk regime will encourage risk-taking and lead to better economic growth, but there is a cost to growth from an extended low-risk environment. See "The impact of risk cycles on business cycles: a historical view". In an extended low-risk environment, there may be excessive risk-taking, the reach for yield which create increased financial vulnerabilities. 

Being too long in a low risk environment may cause a more severe reversal of economic growth. A Minsky moment, which will upend economic growth exists because a low-risk environment is associated with increasing complacency; the longer low-risk beliefs exist, the greater likelihood of growth reversals as investors get shocked by negative macro surprises.

The long-term trends in volatility can be measured to generate low and high-risk environments. From the risk measures across a large set of countries, the researchers created an index of the global duration for low-risk. The evidence suggest that recessions are usually preceded by a high global duration of low-risk, and a period of global extended low-risk will have a stronger effect than a local low-risk period for any given country.

A high-risk period will have an unambiguous impact on economic growth; however, the effect of a low-risk period is unclear. It will have a positive effect on growth, but as the duration of the lower risk environment extends, there will be a corresponding negative impact on growth. Too much of a low-risk environment is a bad thing.