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

55 Pages Posted: 11 Oct 2016

See all articles by Caroline Fohlin

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

Thomas Gehrig

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

Marlene Haas


Date Written: August 17, 2016


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: G000, G140, N000, N200

Suggested Citation

Fohlin, Caroline and Gehrig, Thomas and Haas, Marlene, Rumors and Runs in Opaque Markets: Evidence from Panic of 1907 (August 17, 2016). Available at SSRN: or

Caroline Fohlin (Contact Author)

Emory University ( email )

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

HOME PAGE: http://

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Thomas Gehrig

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom

Marlene Haas


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