Powered by

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Back Next

 

 

Amplification and Asymmetry in Crashes and Frenzies

 

Han N. Ozsoylev, Said Business School and Linacre College, University of Oxford

 

Abstract

We often observe disproportionate reactions to tangible information in large stock price movements. Moreover these movements feature an asymmetry: the number of crashes is more than that of frenzies in the S&P 500 index. This paper offers an explanation for these two characteristics of large movements in which hedging (portfolio insurance) causes amplified price reactions to news and liquidity shocks as well as an asymmetry biased towards crashes. Risk aversion of traders is shown to be essential for the asymmetry of price movements. Also, we show that differential information enhances both amplification and asymmetry delivered by hedging.

 

Keywords: Crash, Frenzy, Hedging, Portfolio insurance

 

JEL Classification Numbers: G11, G12

 

Click here to download paper

 

Back Next