V-shapes

38 Pages Posted: 24 Mar 2020 Last revised: 18 Sep 2020

See all articles by Maria Flora

Maria Flora

University of Verona - Department of Economics

Roberto Renò

University of Verona - Department of Economics

Date Written: March 13, 2020

Abstract

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

Flora, Maria and Renò, Roberto, V-shapes (March 13, 2020). Available at SSRN: https://ssrn.com/abstract=3554122 or http://dx.doi.org/10.2139/ssrn.3554122

Maria Flora (Contact Author)

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 2-37121
Italy

Roberto Renò

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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