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Large Bets and Stock Market Crashes

Author

Listed:
  • Albert S. Kyle

    (Robert H. Smith School of Business, University of Maryland)

  • Anna 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 sales by Soci?et?e G?en?erale in 2008, prices fell by magnitudes similar to predictions from invariance. Larger-than-predicted temporary price declines during two 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 suggest fatter tails or larger variance than the log-normal distribution estimated from portfolio transitions data.

Suggested Citation

  • Albert S. Kyle & Anna Obizhaeva, 2016. "Large Bets and Stock Market Crashes," Working Papers w0227, Center for Economic and Financial Research (CEFIR).
    • Handle: RePEc:cfr:cefirw:w0227
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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. 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).
    3. Jean-Philippe Bouchaud, 2021. "The Inelastic Market Hypothesis: A Microstructural Interpretation," Papers 2108.00242, arXiv.org, revised Jan 2022.
    4. Hu, Conghui & Liu, Yu-Jane & Zhu, Ning, 2021. "Deleveraging commonality," Journal of Financial Markets, Elsevier, vol. 53(C).
    5. 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.
    6. Albert S. Kyle & Anna A. Obizhaeva, 2020. "Adverse Selection and Liquidity: From Theory to Practice," Working Papers w0268, New Economic School (NES).
    7. 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.
    8. Sida Li & Xin Wang & Mao Ye, 2019. "Who Provides Liquidity, and When?," NBER Working Papers 25972, National Bureau of Economic Research, Inc.

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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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