On the Possibility of Stock Market Crashes in the Absence of Portfolio Insurance
Abstractstock market crash on hedging strategies by portfolio insurers, which dictated selling stocks as soon as prices fell. The fact that the practice of buying and selling stocks as portfolio insurance has virtually disappeared since then has given many comfort that a replay of the 1987 crash, when prices fell so much so quickly, is unlikely. This note argues with this view by developing a model in which crashes are possible in the absence of portfolio insurance. In our model, a crash is driven by panic selling among rational but uninformed traders.
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Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1252.
Date of creation: Jan 1999
Date of revision:
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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
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Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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