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Large Bets and Stock Market Crashes

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  • Albert S Kyle
  • Anna A Obizhaeva

Abstract

Some market crashes occur because of significant imbalances in demand and supply. Conventional models fail to explain the large magnitudes of price declines. We propose a unified structural framework for explaining crashes, based on the insights of market microstructure invariance. A proper adjustment for differences in business time across markets leads to predictions which are different from conventional wisdom and consistent with observed price changes during the 1987 market crash and the 2008 sales by Société Générale. Somewhat larger-than-predicted price drops during 1987 and 2010 flash crashes may have been exacerbated by too rapid selling. Somewhat smaller-than-predicted price decline during the 1929 crash may be due to slower selling and perhaps better resiliency of less integrated markets.

Suggested Citation

  • Albert S Kyle & Anna A Obizhaeva, 2023. "Large Bets and Stock Market Crashes," Review of Finance, European Finance Association, vol. 27(6), pages 2163-2203.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:6:p:2163-2203.
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    File URL: http://hdl.handle.net/10.1093/rof/rfad008
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    References listed on IDEAS

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    More about this item

    Keywords

    Crashes; Liquidity; Price impact; Market depth; Systemic risk; Market microstructure; Invariance;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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