Fragility of Financial Markets

Itay Goldstein (), Chong Huang and Liyan Yang
Additional contact information
Itay Goldstein: Department of Finance, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, USA
Chong Huang: Paul Merage School, University of California, Irvine, California, USA
Liyan Yang: Department of Finance, Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario, Canada

Annual Review of Financial Economics, 2025, vol. 17, issue 1, 27-48

Abstract: Fragility of financial markets arises when market prices exhibit amplified reaction to underlying shocks, either fundamental or nonfundamental. The history of financial markets features many examples of such episodes, market-wide or asset-specific, which have generally been of great concern. Using a canonical framework of trading in financial markets, we provide an overview of forces generating fragility. These forces include learning by investors from the price as they make trading decisions and various channels for strategic complementarities among investors that act against price-induced strategic substitutes. We analyze the informativeness and volatility of prices and how they are related to the fragility concept.

Keywords: amplification; financial market fragility; price volatility; learning from prices; strategic complementarity; price informativeness (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1146/annurev-financial-120522-114723
Full text downloads are only available to subscribers. Visit the abstract page for more information.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:anr:refeco:v:17:y:2025:p:27-48

Ordering information: This journal article can be ordered from
http://www.annualreviews.org/action/ecommerce

DOI: 10.1146/annurev-financial-120522-114723

Access Statistics for this article

More articles in Annual Review of Financial Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA.
Bibliographic data for series maintained by http://www.annualreviews.org ().