Amplification and Asymmetry in Crashes and Frenzies

Annals of Finance, Vol. 4, No. 2, 2008

25 Pages Posted: 30 Jun 2012

Date Written: May 1, 2007

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 can enhance both amplification and asymmetry delivered by hedging.

Keywords: Amplification, Asymmetry, Crash, Frenzy, Hedging, Portfolio insurance

JEL Classification: G11, G12

Suggested Citation

Ozsoylev, Han N., Amplification and Asymmetry in Crashes and Frenzies (May 1, 2007). Annals of Finance, Vol. 4, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=2096379

Han N. Ozsoylev (Contact Author)

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
722
PlumX Metrics