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Stock price fragility

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  • Greenwood, Robin
  • Thesmar, David
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    Abstract

    We study the relation between the ownership structure of financial assets and non-fundamental risk. We define an asset to be fragile if it is susceptible to non-fundamental shifts in demand. An asset can be fragile because of concentrated ownership, or because its owners face correlated or volatile liquidity shocks, i.e., they must buy or sell at the same time. We formalize this idea and apply it to mutual fund ownership of US stocks. Consistent with our predictions, fragility strongly predicts price volatility. We then extend the logic of fragility to investigate two natural extensions: (1) the forecast of stock return comovement and (2) the potentially destabilizing impact of arbitrageurs on stock prices.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 3 ()
    Pages: 471-490

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:3:p:471-490

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Mutual funds; Flow-driven trading; Non-fundamental risk;

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    References

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    Cited by:
    1. Greenwood, Robin & Landier, Augustin & Thesmar, David, 2011. "Vulnerable Banks," IDEI Working Papers 700, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Ben-David, Itzhak & Franzoni, Francesco & Moussawi, Rabih, 2011. "ETFs, Arbitrage, and Contagion," Working Paper Series 2011-20, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi, 2014. "Do ETFs Increase Volatility?," NBER Working Papers 20071, National Bureau of Economic Research, Inc.
    4. Lakshithe Wagalath, 2013. "Modeling the rebalancing slippage of Leveraged Exchange-Traded Funds," Working Papers 2014-ACF-02, IESEG School of Management.
    5. Berger, Dave & Pukthuanthong, Kuntara, 2012. "Market fragility and international market crashes," Journal of Financial Economics, Elsevier, vol. 105(3), pages 565-580.
    6. Dong Lou & Christopher Polk, . "Inferring Arbitrage Activity from Return Correlations," FMG Discussion Papers dp721, Financial Markets Group.
    7. Rama Cont & Lakshithe Wagalath, 2013. "Fire sales forensics: measuring endogenous risk," Working Papers 2014-ACF-01, IESEG School of Management.

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