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Endogenous extreme events and the dual role of prices

Danielsson, Jon and Song Shin, Hyun and Zigrand, Jean-Pierre (2012) Endogenous extreme events and the dual role of prices. Annual Review of Economics, 4. pp. 111-129. ISSN 1941-1383

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Identification Number: 10.1146/annurev-economics-080511-110930

Abstract

Extreme events in financial markets are often generated by shocks that are generated 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 mark-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.

Item Type: Article
Official URL: http://www.annualreviews.org/loi/economics
Additional Information: © 2012 Annual Reviews
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 16 Apr 2012 15:33
Last Modified: 21 Sep 2012 10:53
URI: http://eprints.lse.ac.uk/id/eprint/43140

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