1932

Abstract

Extreme events in financial markets are often generated by shocks that come from within the system, rather than those that arrive from outside the system. The combination of risk-sensitive behavior rules and the coordinated actions implied by market-to-market accounting can result in outcome distributions with fat tails, even if the fundamental shocks are Gaussian. We illustrate such endogenous extreme events through the pricing density resulting from dynamic hedging of options and the flash crash of May 2010.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-080511-110930
2012-09-26
2024-05-23
Loading full text...

Full text loading...

/content/journals/10.1146/annurev-economics-080511-110930
Loading
/content/journals/10.1146/annurev-economics-080511-110930
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error