Amplification and asymmetry in crashes and frenzies

Ozsoylev, Han (2008) Amplification and asymmetry in crashes and frenzies. Annals of Finance, 4 (2). pp. 157-181.

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.

Item Type: Article
Keywords: Amplification; Asymmetry; Crash; Frenzy; Hedging; Portfolio insurance
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 11 Feb 2012 16:57
Last Modified: 23 Oct 2015 14:06
URI: http://eureka.sbs.ox.ac.uk/id/eprint/1169

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