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When Everyone Runs for the Exit

Lasse Pedersen

No 7436, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The dangers of shouting ``fire'' in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade when the dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.

Keywords: asset pricing; crisis; liquidity risk; quant; risk management; run; unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E2 E44 E52 G1 G11 G12 G2 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-mac and nep-rmg
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