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Stock Price Fragility

52 Pages Posted: 21 Oct 2009 Last revised: 13 Mar 2013

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

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Date Written: March 2011

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.

Suggested Citation

Greenwood, Robin M. and Thesmar, David, Stock Price Fragility (March 2011). Harvard Business School Research Paper No. 1490734. Available at SSRN: https://ssrn.com/abstract=1490734 or http://dx.doi.org/10.2139/ssrn.1490734

Robin M. Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Thesmar

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States
16172259767 (Phone)

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