Stock Price Fragility

46 Pages Posted: 17 Mar 2010

See all articles by Robin M. Greenwood

Robin M. Greenwood

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

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: March 16, 2010

Abstract

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

Greenwood, Robin M. and Thesmar, David, Stock Price Fragility (March 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572337 or http://dx.doi.org/10.2139/ssrn.1572337

Robin M. Greenwood

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 (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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