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Large Bets and Stock Market Crashes

Author

Listed:
  • Albert S. Kyle

    (University of Maryland)

  • Anna A. Obizhaeva

    (New Economic School)

Abstract

For five stock market crashes, we compare price declines with predictions from market microstructure invariance. During the 1987 crash and the 2008 sales by Societe Generale, prices fell by magnitudes similar to predictions from invariance. Larger-than-predicted temporary price declines during 1987 and 2010 flash crashes suggest rapid selling exacerbates transitory price impact. Smaller-than-predicted price declines for the 1929 crash suggest slower selling stabilized prices and less integration made markets more resilient. Quantities sold in the three largest crashes indicate fatter tails or larger variance than the log-normal distribution estimated from portfolio transitions data.

Suggested Citation

  • Albert S. Kyle & Anna A. Obizhaeva, 2020. "Large Bets and Stock Market Crashes," Working Papers w0269, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0269
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    References listed on IDEAS

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    Cited by:

    1. Albert J. Menkveld & Bart Zhou Yueshen, 2019. "The Flash Crash: A Cautionary Tale About Highly Fragmented Markets," Management Science, INFORMS, vol. 65(10), pages 4470-4488, October.
    2. Hu, Conghui & Liu, Yu-Jane & Zhu, Ning, 2021. "Deleveraging commonality," Journal of Financial Markets, Elsevier, vol. 53(C).
    3. Kang Gao & Perukrishnen Vytelingum & Stephen Weston & Wayne Luk & Ce Guo, 2024. "High-Frequency Financial Market Simulation and Flash Crash Scenarios Analysis: An Agent-Based Modelling Approach," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 27(2), pages 1-8.
    4. Jean-Philippe Bouchaud, 2021. "The Inelastic Market Hypothesis: A Microstructural Interpretation," Papers 2108.00242, arXiv.org, revised Jan 2022.
    5. Sida Li & Xin Wang & Mao Ye, 2019. "Who Provides Liquidity, and When?," NBER Working Papers 25972, National Bureau of Economic Research, Inc.
    6. Albert S. Kyle & Anna A. Obizhaeva, 2020. "Adverse Selection and Liquidity: From Theory to Practice," Working Papers w0268, New Economic School (NES).
    7. Jagannathan, Ravi & Pelizzon, Loriana & Schaumburg, Ernst & Sherman, Mila Getmansky & Yuferova, Darya, 2022. "Recovery from fast crashes: Role of mutual funds," Journal of Financial Markets, Elsevier, vol. 59(PB).
    8. Kang Gao & Perukrishnen Vytelingum & Stephen Weston & Wayne Luk & Ce Guo, 2022. "High-frequency financial market simulation and flash crash scenarios analysis: an agent-based modelling approach," Papers 2208.13654, arXiv.org.

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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