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Endogenous extreme events and the dual role of prices

Danielsson, Jon, 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


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
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Additional Information: © 2012 Annual Reviews
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Date Deposited: 16 Apr 2012 15:33
Last Modified: 20 Aug 2021 01:49

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