Why Do Markets Crash? Bitcoin Data Offers Unprecedented Insights

Jonathan Donier () and Jean-Philippe Bouchaud ()
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Jonathan Donier: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique, Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris Sciences et Lettres, CFM - Capital Fund Management
Jean-Philippe Bouchaud: CFM - Capital Fund Management, CFM-Imperial Institute of Quantitative Finance - Imperial College London

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Abstract: Crashes have fascinated and baffled many canny observers of financial markets. In the strict orthodoxy of the efficient market theory, crashes must be due to sudden changes of the fundamental valuation of assets. However, detailed empirical studies suggest that large price jumps cannot be explained by news and are the result of endogenous feedback loops. Although plausible, a clear-cut empirical evidence for such a scenario is still lacking. Here we show how crashes are conditioned by the market liquidity, for which we propose a new measure inspired by recent theories of market impact and based on readily available, public information. Our results open the possibility of a dynamical evaluation of liquidity risk and early warning signs of market instabilities, and could lead to a quantitative description of the mechanisms leading to market crashes.

Keywords: Financial markets; Fluid flow; Control theory; Economics (search for similar items in EconPapers)
Date: 2015
Note: View the original document on HAL open archive server: https://hal.sorbonne-universite.fr/hal-01277584v1
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Citations: View citations in EconPapers (32)

Published in PLoS ONE, 2015, 10 (10), pp.e0139356. ⟨10.1371/journal.pone.0139356.g006⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01277584

DOI: 10.1371/journal.pone.0139356.g006

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