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Rumors and Runs in Opaque Markets: Evidence from the Panic in 1907

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  • Caroline Fohlin
  • Thomas Gehrig
  • Marlene Haas

Abstract

Using a new daily dataset for all stocks traded on the New York Stock Exchange between 1905 and 1910, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 - one of the most severe financial crises of the twentieth century. We estimate that the market drove up spreads from 0.5 percent to 3 percent during the peak of the crisis and, using a spread decomposition, we identify information risk as the largest component of illiquidity. Information costs rose most in the mining sector - the origin of the stock corner and a sector with among the worst track records of corporate governance and accounting. We find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Despite short-term cash infusions into the market, the market remained relatively illiquid for several months following the peak of the panic. Notably, market illiquidity risk is priced in the cross-section of stock returns. Thus, our findings demonstrate how opaque systems allow idiosyncratic rumors to spread and amplify into a long-lasting market-wide crisis.

Suggested Citation

  • Caroline Fohlin & Thomas Gehrig & Marlene Haas, 2016. "Rumors and Runs in Opaque Markets: Evidence from the Panic in 1907," Emory Economics 1605, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:1605
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    Cited by:

    1. Gehrig, Thomas & Haas, Marlene, 2016. "Anomalous Trading Prior to Lehman Brothers' Failure," CEPR Discussion Papers 11194, C.E.P.R. Discussion Papers.
    2. Caroline Fohlin, 2016. "When 'No News' is Bad News: Complexity and Uncertainty in the Global Crisis of 1914," Emory Economics 1606, Department of Economics, Emory University (Atlanta).
    3. Ellis W. Tallman & Jon R. Moen, 2018. "The transmission of the financial crisis in 1907: an empirical investigation," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 12(2), pages 277-312, May.
    4. Moen, Jon & Tallman, Ellis, 2018. "Outside Lending in the New York City Call Loan Market," MPRA Paper 88733, University Library of Munich, Germany.
    5. Grodecka, Anna & Kenny, Seán & Ögren, Anders, 2018. "Predictors of Bank Distress: The 1907 Crisis in Sweden," Lund Papers in Economic History 180, Lund University, Department of Economic History.

    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • N00 - Economic History - - General - - - General
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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