Stock Price Fragility
46 Pages Posted: 17 Mar 2010
Date Written: March 16, 2010
We study the relationship 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, ie., 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 issues: (1) the forecast of stock return comovement and (2) the potentially destabilizing impact of arbitrageurs on stock prices.
Keywords: non-fundamental risk, volatiltiy, comovement, destabilizing arbitrage
JEL Classification: G12, G14
Suggested Citation: Suggested Citation