38 Pages Posted: 24 Mar 2020 Last revised: 18 Sep 2020
Date Written: March 13, 2020
An insidious form of market inefficiency, by which prices lose their informativeness and wealth is distributed arbitrarily, translates into V-shapes, that is sudden changes of the sign of the price drift. We use this insight to develop a new tool for the detection of reverting drift, the V-statistic. We apply this tool to (i) quantify the extent of this kind of market inefficiency in the U.S. stock market during the Covid-19 pandemic; and (ii) show the harmful consequences of V-shapes on financial stability by estimating the huge loss suffered by Italian taxpayers (0.45B euros) in May 2018, when a transient crash hit the secondary bond market during a Treasury auction.
Keywords: Market inefficiency, financial fragility, price drift, financial stability, flash crash.
JEL Classification: G14, G12, C58
Suggested Citation: Suggested Citation