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Fragility of Financial Markets

Author

Listed:
  • Itay Goldstein

    (Department of Finance, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, USA)

  • Chong Huang

    (Paul Merage School, University of California, Irvine, California, USA)

  • Liyan Yang

    (Department of Finance, Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario, Canada)

Abstract

Fragility of financial markets arises when market prices exhibit amplified reaction to underlying shocks, either fundamental or nonfundamental. The history of financial markets features many examples of such episodes, market-wide or asset-specific, which have generally been of great concern. Using a canonical framework of trading in financial markets, we provide an overview of forces generating fragility. These forces include learning by investors from the price as they make trading decisions and various channels for strategic complementarities among investors that act against price-induced strategic substitutes. We analyze the informativeness and volatility of prices and how they are related to the fragility concept.

Suggested Citation

  • Itay Goldstein & Chong Huang & Liyan Yang, 2025. "Fragility of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 17(1), pages 27-48, November.
    • Handle: RePEc:anr:refeco:v:17:y:2025:p:27-48
    DOI: 10.1146/annurev-financial-120522-114723
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    Keywords

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    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

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