Amplification and Asymmetry in Crashes and Frenzies

Han Ozsoylev

No 2005-FE-11, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: We often observe disproportionate reactions to tangible information in large stock price movements. Moreover these movements feature an asymmetry: the number of crashes is more than that of frenzies in the S&P 500 index. This paper offers an explanation for these two characteristics of large movements in which hedging (portfolio insurance) causes amplified price reactions to news and liquidity shocks as well as an asymmetry biased towards crashes. Risk aversion of traders is shown to be essential for the asymmetry of price movements. Also, we show that differential information enhances both amplification and asymmetry delivered by hedging.

Keywords: Crash; Frenzy; Hedging; Portfolio insurance (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2005-10-01
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Related works:
Journal Article: Amplification and asymmetry in crashes and frenzies (2008)
Working Paper: Amplification and Asymmetry in Crashes and Frenzies (2005)
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