Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907

54 Pages Posted: 8 Apr 2015 Last revised: 8 Aug 2016

See all articles by Caroline Fohlin

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Vienna Graduate School of Finance (VGSF); Systemic Risk Centre - LSE

Marlene Haas

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2016

Abstract

Using a new daily dataset for all stocks traded on the New York Stock Exchange between 1905 and 1910, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 - one of the most severe financial crises of the 20th century. We estimate that the market run drove up spreads from 0.5% to 3% during the peak of the crisis and, using a spread decomposition, we identify information risk as the largest component of illiquidity. Information costs rose most in the mining sector - the origin of the stock corner and a sector with among the worst track records of corporate governance and accounting. We find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Despite short-term cash infusions into the market, the market remained relatively illiquid for several months following the peak of the panic. Notably, market illiquidity risk is priced in the cross section of stock returns. Thus, our findings demonstrate how opaque systems allow idiosyncratic rumors to spread and amplify into a long-lasting, market-wide crisis.

Keywords: Microstructure, Panic, Information Asymmetry, Funding Illiquidity, Market Illiquidity, Fire Sales, Price Discovery

JEL Classification: G00, G14, N00, N02

Suggested Citation

Fohlin, Caroline and Gehrig, Thomas and Haas, Marlene, Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907 (August 5, 2016). Available at SSRN: https://ssrn.com/abstract=2591343 or http://dx.doi.org/10.2139/ssrn.2591343

Caroline Fohlin (Contact Author)

Emory University ( email )

Dept. of Economics
Atlanta, GA Georgia 30322
United States
4047276363 (Phone)

HOME PAGE: http://https://scholar.google.com/citations?user=Ma08bxEAAAAJ&hl=en

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom
London

Marlene Haas

Independent

No Address Available

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