Amplification and Asymmetry in Crashes and Frenzies

Ozsoylev, Han N.

Abstract

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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

Abstract:
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, G12

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Date posted: June 30, 2012

Suggested Citation

Ozsoylev, Han N., Amplification and Asymmetry in Crashes and Frenzies (May 1, 2007). Annals of Finance, Vol. 4, No. 2, 2008. Available at SSRN: http://ssrn.com/abstract=2096379

Contact Information

Han N. Ozsoylev (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain