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Liquidation Cascade and Anticipatory Trading: Evidence from the Structured Equity Product Market

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  • Jun Kyung Auh
  • Wonho Cho
  • Thierry Foucault

Abstract

We show that structured equity derivatives can cause significant price pressure of the underlying stock upon an event of dramatic payoff change. Moreover, one event causes another: the event cascade amplifies the magnitude of the impact. We find that a single event accounts for a −6.4% return on the event day, and it increases the probability of a subsequent event by 21.3%. Given the negative price impact, traders try to liquidate ahead of each other, exacerbating the degree of price pressure. Our results uncover the chain-reaction and (mis)coordination mechanism in complex derivatives markets that can provoke substantial price shocks. (JEL G12, G14, G24).

Suggested Citation

  • Jun Kyung Auh & Wonho Cho & Thierry Foucault, 2023. "Liquidation Cascade and Anticipatory Trading: Evidence from the Structured Equity Product Market," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 13(1), pages 53-98.
    • Handle: RePEc:oup:rasset:v:13:y:2023:i:1:p:53-98.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raac010
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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