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Stock Price Fragility
Robin M. Greenwood
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
David Thesmar
HEC Paris - Finance Department
March 2011
Harvard Business School Research Paper No. 1490734
Abstract:
We study the relation between the ownership structure of financial assets and non-fundamental risk. We define an asset to be fragile if it is susceptible to non-fundamental shifts in demand. An asset can be fragile because of concentrated ownership, or because its owners face correlated or volatile liquidity shocks, i.e., they must buy or sell at the same time. We formalize this idea and apply it to mutual fund ownership of US stocks. Consistent with our predictions, fragility strongly predicts price volatility. We then extend the logic of fragility to investigate two natural extensions: (1) the forecast of stock return comovement and (2) the potentially destabilizing impact of arbitrageurs on stock prices.
Number of Pages in PDF File: 52
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Date posted: October 21, 2009
; Last revised: March 13, 2013
Suggested CitationGreenwood, Robin M. and Thesmar, David, Stock Price Fragility (March 2011). Harvard Business School Research Paper No. 1490734. Available at SSRN: http://ssrn.com/abstract=1490734 or http://dx.doi.org/10.2139/ssrn.1490734
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