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When Everyone Runs for the Exit

  • Lasse Heje Pedersen

The dangers of shouting "fire" in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade when the dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15297.

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Date of creation: Aug 2009
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Publication status: published as Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
Handle: RePEc:nbr:nberwo:15297
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