Flash Crashes: The Role of Information Processing Based Subordination and the Cauchy Distribution in Market Instability

Journal of Insurance and Financial Management, Vol. 2, No. 7 (2016)

15 Pages Posted: 18 Jul 2016 Last revised: 8 Dec 2018

See all articles by Edgar Parker

Edgar Parker

New York Life Insurance Company

Date Written: July 15, 2016

Abstract

While a wide variety of hypotheses have been offered to explain the anomalous market phenomena known as a “Flash Crash”, there is as of yet no consensus among financial experts as to the sources of these sudden market collapses. In contrast to the behavior expected from standard financial theory, both the equity and bond markets have been thrown into freefall in the absence of any significant news event. The author posits that a combination of probability and information theory, and diffusion dynamics offers a relatively simple explanation of the causes of some of these dramatic events. This new avenue of research also suggests new policies or measures to lower the probability of occurrence and to mitigate the effects of these extreme events.

Keywords: Subordination, Cauchy Distribution, Flash Crash, HFT, Brownian motion, Information Theory

JEL Classification: G1, G010, G12, G14, G170, D800

Suggested Citation

Parker, Edgar, Flash Crashes: The Role of Information Processing Based Subordination and the Cauchy Distribution in Market Instability (July 15, 2016). Journal of Insurance and Financial Management, Vol. 2, No. 7 (2016), Available at SSRN: https://ssrn.com/abstract=2810259 or http://dx.doi.org/10.2139/ssrn.2810259

Edgar Parker (Contact Author)

New York Life Insurance Company ( email )

51 Madison Avenue
New York, NY 10010
United States

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