Download this Paper Open PDF in Browser

Stock Price Crashes: Role of Capital Constrained Traders

54 Pages Posted: 4 Dec 2017 Last revised: 9 Dec 2017

Mila Getmansky

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Ernst Schaumburg

Federal Reserve Banks - Federal Reserve Bank of New York

Darya Yuferova

Norwegian School of Economics (NHH) - Department of Finance

Date Written: December 8, 2017

Abstract

We study two fast crashes using orders/cancellations/trades data with trader identities for a stock trading in the spot and single stock futures markets on the National Stock Exchange of India during April-June/2006 when there was no algorithmic trading. Spot (futures) prices fell by 6.1% (4.6%) and 11.1% (12.3%) within 15 minutes during crashes. Buying by capital constrained short-term-traders who were the primary intraday liquidity providers was not sufficient to halt price decline. Domestic mutual funds, slow to move in, bought sufficient quantities leading to price recovery. Crashes and recoveries began in the spot market though volume was higher in futures.

Keywords: Liquidity Provision, Market Fragility, Flash Crash, Slow-Moving Capital, Hot-Potato Trading

JEL Classification: G12, G14

Suggested Citation

Getmansky, Mila and Jagannathan, Ravi and Pelizzon, Loriana and Schaumburg, Ernst and Yuferova, Darya, Stock Price Crashes: Role of Capital Constrained Traders (December 8, 2017). Available at SSRN: https://ssrn.com/abstract=3079593

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )

Amherst, MA 01003-4910
United States

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Ernst Schaumburg

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Darya Yuferova (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Paper statistics

Downloads
19
Abstract Views
60