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When Everyone Runs for the Exit
Lasse Heje Pedersen
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
August 20, 2009
NYU Working Paper No. FIN-09-25
Abstract:
The dangers of shouting \re" in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features,and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade whenthe dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.
Number of Pages in PDF File: 20
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Date posted: December 8, 2009
Suggested CitationPedersen, Lasse Heje, When Everyone Runs for the Exit (August 20, 2009). NYU Working Paper No. FIN-09-025. Available at SSRN: http://ssrn.com/abstract=1519256
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