 Extreme returns: The case of currenciesCarol Osler and Tanseli Savaser Journal of Banking & Finance, 2011, vol. 35, issue 11, 2868-2880 Abstract: Financial market crashes can occur even in the absence of news. This paper highlights four properties of price-contingent trading that increase the frequency of such events. Price-contingent trading is common across financial market, since it includes algorithmic trading, technical trading, and dynamic option hedging. The four properties we consider are: (1) high kurtosis in the distribution of order sizes; (2) clustering of trades within the day; (3) clustering of trades at certain prices; and (4) feedback between trading and returns. The paper estimates the relative importance of these factors using data from the foreign exchange market. Calibrated simulations indicate that interactions among these factors are at least as important as any single one. Among individual factors, the orders' size distribution and feedback effects have the strongest influence. Overall, price-contingent trading could account for half of realized excess kurtosis. The paper suggests that extreme returns unaccompanied by news are statistically inevitable in the presence of price-contingent trading. Keywords: Crash; risk; Fat; tails; Exchange; rates; High; frequency; Microstructure; Jump; process; Value-at-risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:11:p:2868-2880 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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