Economics at your fingertips  

Self-fulfilling arbitrages necessitate crash risk

Dong-Hyun Ahn, Soohun Kim and Kyoungwon Seo

Journal of Financial Markets, 2020, vol. 51, issue C

Abstract: We propose a model in which hedge funds can initiate a sequence of arbitrage opportunities and a potential market crash without any exogenous shock. When hedge fund managers share a concern about a rare event, not necessarily affecting the fundamentals, some hedge funds may opt out for fear of redemption risk, leading to coordination failure. Our model demonstrates that the coordination failure generates an arbitrage opportunity but it comes with a chance of a market crash. It explains hedge funds’ low leverage before the recent financial crisis and discusses their conflicting features of causing a financial crisis and enhancing market efficiency.

Keywords: Fragile capital structure; Fund manager incentive (search for similar items in EconPapers)
JEL-codes: G01 G23 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

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:

DOI: 10.1016/j.finmar.2020.100547

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-06-30
Handle: RePEc:eee:finmar:v:51:y:2020:i:c:s1386418120300161