Amplification and Asymmetry in Crashes and Frenzies
Han N. Ozsoylev
University of Oxford - Said Business School
May 1, 2007
Annals of Finance, Vol. 4, No. 2, 2008
We often observe disproportionate reactions to tangible information in large stock price movements. Moreover these movements feature an asymmetry: the number of crashes is more than that of frenzies in the S&P 500 index. This paper offers an explanation for these two characteristics of large movements in which hedging (portfolio insurance) causes amplified price reactions to news and liquidity shocks as well as an asymmetry biased towards crashes. Risk aversion of traders is shown to be essential for the asymmetry of price movements. Also, we show that differential information can enhance both amplification and asymmetry delivered by hedging.
Number of Pages in PDF File: 25
Keywords: Amplification, Asymmetry, Crash, Frenzy, Hedging, Portfolio insurance
JEL Classification: G11, G12Accepted Paper Series
Date posted: June 30, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.718 seconds