rational panics and stock market crashes abstract this paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders we show that uninformed traders can precipitate a price crash because as prices decline they surmise that informed traders received negative information which leads them to reduce their demand for assets and drive the price of stocks even lower the model yields several implications such as that crashes can occur even when the fundamentals are strong and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market

is there private information in the fx market the tokyo experiment it is a common view that private information in the foreign exchange market does not exist we provide evidence against this view the evidence comes from the introduction of trading in tokyo over the lunch hour lunch re turn variance doubles with the introduction of trading which cannot be due to public information since the flow of public information did not change with the trading rules having eliminated public information as the cause we exploit the volatility pattern over the whole day to discriminate between the two alternatives private information and pricing errors three key re sults support the predictions of private information models first the vola tility u shape flattens greater revelation over lunch leaves a smaller share for the morning and afternoon second the u shape tilts upward an impli cation of information whose private value is transitory finally the morning exhibits a clear u shape when tokyo closes over lunch and it disappears when trading is introduced

quantifying and understanding the economics of large financial movements abstract financial market data offer the exciting possibility of quantifying and understanding the physics of a complex dynamical system and the hope that this line of thinking may give some insights into understanding collective human behavior various measures of stock market activity have been found to exhibit puzzling features that have recently attracted much research attention these features include the power law distributions of return volume number of trades assets under management of trading institutions and other power law relations linking them here we review these empirical results and show that some of these findings can be usefully interpreted within the framework of a reduced form model gabaix x gopikrishnan p plerou v stanley h e 2003 a theory of power law distributions in financial market fluctuations nature 423 267 270 and an economic model gabaix x gopikrishnan p plerou v stanley h e 2006b institutional investors and stock market volatility quarterly journal of economics 121 461 504 the features not only present a challenge to models of market fluctuations but their specific power law nature also suggests new modeling directions which include ideas from statistical physics which proved useful in understanding similar relationships that occur in the physics of critical phenomena

speculation and hedging in segmented markets we analyze a model in which traders have different trading opportunities and learn information from prices the difference in trading opportunities implies that different traders may have different trading motives when trading in the same market some trade for speculation and others for hedging and thus they may respond to the same information in opposite directions this implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps our model is relevant to various realistic settings and helps to understand a variety of modern financial markets

who would pay more for a fragrance free laundry detergent how health information affects valuation abstractfragrance allergy is a lifelong condition and the probability of being affected increases with frequent exposure to fragrance currently fragrance free laundry detergents are not common in supermarkets we used a contingent valuation among austrian consumers in a within respondent treatment to estimate how willingness to pay is influenced by health information we found that higher income groups have a higher willingness to pay for fragrance free detergents informing consumers about health impacts substantially increases this difference our simulation shows that lower income groups benefit from health information only if low priced fragrance free detergents are available on the market

are consumers concerned about palm oil evidence from a lab experiment abstract a lab experiment evaluates the consumers willingness to pay wtp for food products made with and without palm oil palm oil production induces environmental damages and its consumption presents a health risk however the production of alternative oils raises land use issues in the experiment successive messages emphasizing the characteristics of palm oil and palm oil free products are delivered to participants information has a significant influence on wtp when it underlines the negative impact of the related product this effect is stronger for the palm oil product than for the palm oil free product the experiment also compares the welfare effects of two regulatory instruments namely a consumer information campaign versus a per unit tax because of the respective attributes of both palm oil and palm oil free products the information campaign improves welfare with a much larger impact than the tax

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

rational asset price movements without news this paper argues that an important part of movements in asset prices may be caused by neither external news nor irrationality but by the revelation of information by the trading process itself two models are developed that illustrate this general idea one model is based on investor uncertainty about the quality of other investors information the other is based on dispersion of information and small costs to trading the analysis is used to suggest a possible rational explanation of the october 1987 crash copyright 1993 by american economic association

shrewd crude or simply deluded comovement and the internet stock phenomenon we show that i return comovement among internet stocks during the late 1990s and early 2000 was not exceedingly high ii there was substantial consistency in the manner by which investors distinguished among internet stocks and iii high comovement is most common during periods of price erosion these results cast doubt on the view that the extraordinary appreciation of internet stocks was due to the crude classification of all such stocks as members of a hot category

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

asymmetric price movements and borrowing constraints a rational expectations equilibrium model of crises contagion and confusion this study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints consistent with empirical observations the model finds 1 crises can be caused by small shocks to fundamentals 2 market return distributions are asymmetric and 3 correlations among asset returns tend to increase during crashes the model also predicts 1 crises and contagion are likely to occur after small shocks in the intermediate price region 2 the skewness of asset price distributions increases with information asymmetry and borrowing constraints and 3 crises can spread through investor borrowing constraints

on existence and uniqueness of equilibrium in a class of noisy rational expectations models i study a general class of noisy rational expectations models that nests the standard grossman and stiglitz 1980 and hellwig 1980 models but relaxes the usual assumption of joint normality of asset pay offs and supply and allows for more general signal structures i provide a constructive proof of existence of equilibrium characterize the price function and provide sufficient conditions for uniqueness within the class of equilibria with continuous price functions which are met by both the grossman and stiglitz 1980 models and the hellwig 1980 models with a continuum of investors my solution approach does not rely on the typical conjecture and verify method and i exhibit a number of non normal examples in which asset prices can be characterized explicitly and in a closed form the results presented here open up a broad class of models for applied work to illustrate the usefulness of generalizing the standard model i show that in settings with non normally distributed pay offs shocks to fundamentals may be amplified purely due to learning effects price drifts can arise naturally and the disagreement return relation depends in a novel way on return skewness

those who know most insider trading in eighteenth century amsterdam this paper studies how private information is incorporated into prices using a unique setting from the eighteenth century that is closer to stylized models of price discovery than modern day markets specifically the paper looks at english securities traded in both london and amsterdam private information reached amsterdam through sailing boats that sailed only twice a week and in adverse weather could not sail at all results are consistent with a kyle model in which informed agents trade strategically most importantly the speed of information revelation in amsterdam depended on the expected time until the private signal would become public

deutsche mark dollar volatility intraday activity patterns macroeconomic announcements and longer run dependencies this paper provides a detailed characterization of the volatility in the deutsche mark dollar foreign exchange market using an annual sample of five minute returns the approach captures the intraday activity patterns the macroeconomic announcements and the volatility persistence arch known from daily returns the different features are separately quantified and shown to account for a substantial fraction of return variability both at the intraday and daily level the implications of the results for the interpretation of the fundamental driving forces behind the volatility process is also discussed the efficient market hypothesis contends that financial asset prices provide rational assessments of fundamental values and future payoffs by implication price changes should reflect the arrival and processing of all relevant new information however the proportion of return variability that can be ascribed to public news announcements is low for example cutler poterba and summers 1989 find that even the largest daily price changes in the stock market generally cannot be associated with any significant economic news 1 moreover proxies for the flow of public information e g the number of news items released by reuter s news service berry and hiowe 1994 or dow jones company mitchell and mulherin 1994 explain little of the overall variation thus if private information is ruled out proponents of rational price formation have to assert the existence of important news items

international capital flows under dispersed private information abstract it is well established that private information is critical to our understanding of asset prices in this paper we argue that it also affects international capital flows and use a simple two country dsge model to illustrate its impact we show that private information i increases the volatility of both net and gross capital flows ii leads to a high correlation between capital inflows and outflows iii leads to a disconnect of capital flows from observed macro fundamentals and iv implies that capital flows contain information about the future macro fundamentals we also show that dispersed information affects capital flows both through asset prices and directly so that the impact on flows is not just the mirror image of the impact on prices

dynamic co movements of stock market returns implied volatility and policy uncertainty we examine time varying correlations among stock market returns implied volatility and policy uncertainty our findings suggest that correlations are indeed time varying and sensitive to oil demand shocks and us recessions

market crashes and informational avalanches this paper analyses a security market with transaction costs and a sequential trading structure transaction costs may prevent many traders from revealing their private information if they trade in a sequential fashion due to the information aggregation failure hidden information gets accumulated in the market which may be revealed by a small trigger yielding a high volatility in the absence of an accompanying event the paper first characterizes the optimal trading strategy of the agent which constitute the unique equilibrium further properties of the price sequence are obtained using the concepts of informational cascade and informational avalanche the results are applied to the explanation of market crashes in particular the dynamics of market crashes are illustrated as evolving through the following four phases 1 boom 2 euphoria 3 trigger and 4 panic where the euphoria corresponds to the informational cascade and the panic corresponds to the informational avalanche

opaque financial reports r2 and crash risk abstract we investigate the relation between the transparency of financial statements and the distribution of stock returns using earnings management as a measure of opacity we find that opacity is associated with higher r2s indicating less revelation of firm specific information moreover opaque firms are more prone to stock price crashes consistent with the prediction of the jin and myers 2006 r2 around the world new theory and new tests journal of financial economics 79 257 292 model however these relations seem to have dissipated since the passage of the sarbanes oxley act suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment

adaptive expectations and stock market crashes a theory is developed that explains how stocks can crash without fundamental news and why crashes are more common than frenzies a crash occurs via the interaction of rational and naive investors naive traders believe that prices follow a random walk with serially correlated volatility their expectations of future volatility are formed adaptively when the market crashes naive traders sell stock in response to the apparent increase in volatility since rational traders are risk averse as well a lower price is needed to clear the market the crash is a self fulfilling prophecy frenzies cannot occur in this model

institutional investors and stock market volatility statement of responsibility on t p reads xavier gabaix parameswaran gopikrishnan vasiliki plerou h eugene stanley

trading structure and overnight information a natural experiment from the tel aviv stock exchange abstract a unique data set from the tel aviv stock exchange tase is used to study the effect of trading mechanisms on stock return volatility the tase represents a natural experiment which allows separation of the overnight information effect from the trading mechanism effect the data span a time period in which the order of the trading mechanisms a sequential continuous mechanism and a call auction was switched since overnight information should impact opening prices equally across periods this affords an unparalleled opportunity to examine the trading mechanism effect without the confounding effect of the non trading period this paper finds that the null that opening variances equal closing variances cannot be rejected for either period further the tests cannot reject null that the ratio of opening to closing return variances is equal across periods this suggests that the trading mechanisms on the tase do not differ in their effect upon return volatility

rational frenzies and crashes most markets clear through a sequence of sales rather than through a walrasian auctioneer because buyers can decide whether to buy now or later rather than only now or never their current willingness to pay is much more sensitive to price than the demand curve is a consequence is that markets will be extremely sensitive to new information leading to both frenzies in which demand feeds on itself and crashes in which price drops discontinuously the paper also shows how a result from static auction theory the revenue equivalence theorem can be applied to solve for a dynamic price path

financial entanglement a theory of incomplete integration leverage crashes and contagion abstract we propose a unified model of limited market integration asset price determination leveraging and contagion investors and firms are located on a circle and access to markets involves participation costs that increase with distance due to a complementarity between participation and leverage decisions the equilibrium may exhibit diverse leverage and participation choices across investors although investors are ex ante identical small changes in market access costs can cause a change in the type of equilibrium leading to discontinuous price changes deleveraging and portfolio flow reversals moreover the market is subject to contagion an adverse shock to investors in some locations affects prices everywhere jel d83 g11 g12 g32 g35

endogenous diffusion of technology abstract this paper presents a positive theory of diffusion of technology it examines a two period model strategic firms are confronted by a process technology with an uncertain reduction in marginal costs the uncertainty is automatically resolved between the two periods adoption in the first period yields a leadership advantage relative to firms that do not adopt while simultaneous adoption by firms results in a cournot equilibrium the firms strategies are both production quantities and adoption timings these decisions are made at the same time thus firms face a trade off between early adoption and possibly reaping first mover advantages on one hand and deferring the adoption decision until after all the uncertainty is resolved but face the possibiity of being a follower in the market interestingly an endogenously determined diffusion rate is obtained as a pure strategy nash equilibrium of this game this means that while adoption and diffusion of technology results with probability one diffusion of a bad innovation is also possible it is also shown that in a market with one large firm and a nonatomic continuum of small firms there is a unique nash equilibrium in which the large firm adopts first and is a stackelberg leader and all the small firms decide whether or not to adopt after the uncertainty is resolved the implication of this result is simply that the diffusion of technology is to some extent determined by the relative size of firms in the industry

horizontal and vertical differentiation the launhardt model we show how the spatial duopoly proposed by launhardt in 1885 where firms have access to different transportation technologies allows one to model in a simple and elegant way the two major types of product differentiation i e horizontal and vertical we consider the cases where firms are located near the market end points or near the market center launhardt s analysis of price determination is then extended by allowing firms to choose strategically their transportation rates subgame perfect nash equilibria involve minimum maximum vertical product differentiation when horizontal product differentiation is large small enough

volume autocorrelation information and investor trading this study investigates whether the widely documented daily correlated trading volume of stocks is driven by individual investor trading institutional trading or both we find that at least 95 of nyse and amex stocks exhibit statistically significant positive serial correlation volume autocorrelation decreases with the level of institutional ownership of a stock we also show that the rate of arrivals of new information to the market contributes to the clustering of trades when there is high information flow to the market institutional trading generates a more pronounced effect on volume autocorrelation than individual investor trading our results are broadly consistent with the predictions of trading volume patterns suggested by most theoretical models of stock trading and by empirical research on investor trading

price formation on stock exchanges the evolution of trading within the day prior analyses of prices of the nyse and other exchanges find that transitory price volatility is greater at the open of trading than at the close we extend this line of research by using 40 years of hourly dow jones 65 composite price index data to estimate transitory volatility throughout the trading day our results indicate that transitory volatility steadily declines during the trading day we find a similar intraday decline in transitory volatility for a 2 1 2 year sample of the individual firms in the dow jones 30 industrials index the results are consistent with the hypothesis that trading aids price formation and do not support the argument that particular trading mechanisms are the source of greater volatility at the open of trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

corporate philanthropy and stock price crash risk evidence from china how to mitigate stock price crash risk has become a focus in the theoretical and practical fields building on the work of kim et al j bank finance 43 1 13 2014b this paper investigates the relation between corporate philanthropy and crash risk under the unique chinese institutional background the results show that both state ownership and the 2005 split share reform attenuate the mitigating effect of corporate philanthropy on crash risk specifically the negative relation between corporate philanthropy and crash risk is less pronounced for state owned enterprises than for non state owned enterprises and it is also less pronounced after firms accomplish the split share reform further this effect is more pronounced for firms with greater financial risks and poorer performance our paper contributes to the growing literature on the determinants of stock price crash risk and the economic consequences of corporate philanthropy it also offers useful guidance to firms that are seeking to reduce stock price crash risk in emerging markets