Market Panics, Frenzies, and Informational Efficiency: Theory and Experiment

Chad Kendall

American Economic Journal: Microeconomics, 2020, vol. 12, issue 3, 76-115

Abstract: In a market rush, the fear of future adverse price movements causes traders to trade before they become well informed, reducing the informational efficiency of the market. I derive theoretical conditions under which market rushes are equilibrium behavior and study how well these conditions organize trading behavior in a laboratory implementation of the model. Market rushes, including both panics and frenzies, occur more frequently when predicted by theory. However, subjects use commonly discussed, momentum-like strategies that lead to informational losses not predicted by theory, suggesting that these strategies may exacerbate both the occurrence and consequences of panics and frenzies.

JEL-codes: C91 D83 G14 G41 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmic:v:12:y:2020:i:3:p:76-115

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DOI: 10.1257/mic.20180190

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