Liquidation Cascade and Anticipatory Trading: Evidence from the Structured Equity Product Market

Jun Kyung Auh, Wonho Cho and Thierry Foucault

The Review of Asset Pricing Studies, 2023, vol. 13, issue 1, 53-98

Abstract: We show that structured equity derivatives can cause significant price pressure of the underlying stock upon an event of dramatic payoff change. Moreover, one event causes another: the event cascade amplifies the magnitude of the impact. We find that a single event accounts for a −6.4% return on the event day, and it increases the probability of a subsequent event by 21.3%. Given the negative price impact, traders try to liquidate ahead of each other, exacerbating the degree of price pressure. Our results uncover the chain-reaction and (mis)coordination mechanism in complex derivatives markets that can provoke substantial price shocks. (JEL G12, G14, G24).

Date: 2023
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