A perfect storm in the financial market

Chune Young Chung, Seok-Kyun Hur and Kainan Wang

Journal of Financial Stability, 2022, vol. 61, issue C

Abstract: This study provides a model explaining how small changes in asset prices may disrupt an entire financial market. Based on the capital asset pricing model (CAPM), our model implies that during a market crash, asset price changes affect the relative distribution of the CAPM betas of individual assets and force all tradable assets to co-move. Using US stock market data, our empirical results are consistent with the model’s predictions. Overall, the study aids understanding of the price patterns of assets during substantial market downturns, such as financial crises.

Keywords: Capital asset pricing model; Beta distribution; Market crash; Financial crisis (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:61:y:2022:i:c:s1572308922000572

DOI: 10.1016/j.jfs.2022.101034

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