Amplification and asymmetry in crashes and frenzies
AbstractWe often observe disproportionate reactions to tangible information in large stock price movements. Moreover these movements feature an asymmetry: the number of crashes is more than that of frenzies in the S&P 500 index. This paper offers an explanation for these two characteristics of large movements in which hedging (portfolio insurance) causes amplified price reactions to news and liquidity shocks as well as an asymmetry biased towards crashes. Risk aversion of traders is shown to be essential for the asymmetry of price movements. Also, we show that differential information enhances both amplification and asymmetry delivered by hedging.
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Bibliographic InfoArticle provided by Springer in its journal Annals of Finance.
Volume (Year): 4 (2008)
Issue (Month): 2 (March)
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Web page: http://www.springerlink.com/link.asp?id=112370
Amplification; Asymmetry; Crash; Frenzy; Hedging; Portfolio insurance; G11; G12;
Other versions of this item:
- Han N. Ozsoylev, 2005. "Amplification and Asymmetry in Crashes and Frenzies," Economics Series Working Papers 2005-FE-11, University of Oxford, Department of Economics.
- Han N. Ozsoylev, 2005. "Amplification and Asymmetry in Crashes and Frenzies," OFRC Working Papers Series 2005fe11, Oxford Financial Research Centre.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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