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When Everyone Runs for the Exit

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  • Lasse Heje Pedersen

Abstract

The dangers of shouting "fire" in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade when the dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15297.

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Date of creation: Aug 2009
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Publication status: published as Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
Handle: RePEc:nbr:nberwo:15297

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Cited by:
  1. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-31, Scottish Institute for Research in Economics (SIRE).
  2. André K. Anundsen & Ragnar Nymoen & Tord S. Krogh & Jon Vislie, 2012. "The macroeconomics of Trygve Haavelmo," Nordic Journal of Political Economy, Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 37, pages 2.
  3. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis‌, . "Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis," Working Papers, Business School - Economics, University of Glasgow 2013_13, Business School - Economics, University of Glasgow.
  4. Yan, Wanfeng & Woodard, Ryan & Sornette, Didier, 2012. "Diagnosis and prediction of rebounds in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(4), pages 1361-1380.
  5. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2010. "Rollover Risk and Market Freezes," NBER Working Papers 15674, National Bureau of Economic Research, Inc.
  6. Tommaso Mancini Griffoli & Angelo Ranaldo, 2010. "Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity," Working Papers 2010-14, Swiss National Bank.
  7. Momtchil Pojarliev & Richard M. Levich, 2010. "Detecting Crowded Trades in Currency Funds," NBER Working Papers 15698, National Bureau of Economic Research, Inc.
  8. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers, Business School - Economics, University of Glasgow 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
  9. Chollete, Loran, 2011. "A Model of Endogenous Extreme Events," UiS Working Papers in Economics and Finance, University of Stavanger 2012/2, University of Stavanger.
  10. Economou, Fotini & Kostakis, Alexandros & Philippas, Nikolaos, 2011. "Cross-country effects in herding behaviour: Evidence from four south European markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(3), pages 443-460, July.

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