Large Bets and Stock Market Crashes
54 Pages Posted: 17 Mar 2012 Last revised: 20 Apr 2019
Date Written: March 22, 2019
For five stock market crashes, we compare price declines with predictions from market microstructure invariance. During the 1987 crash and the 2008 sales by Société Générale, prices fell by magnitudes similar to predictions from invariance. Larger-than-predicted temporary price declines during 1987 and 2010 flash crashes suggest rapid selling exacerbates transitory price impact. Smaller-than-predicted price declines for the 1929 crash suggest slower selling stabilized prices and less integration made markets more resilient. Quantities sold in the three largest crashes indicate fatter tails or larger variance than the log-normal distribution estimated from portfolio transitions data.
Keywords: finance, market microstructure, invariance, crashes, liquidity, price impact, market depth, systemic risk
JEL Classification: G01, G28, N2
Suggested Citation: Suggested Citation