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Rational Frenzies and Crashes
- Publisher
- American Economic Association
- Copyright
- Copyright © 2020 © American Economic Association
- ISSN
- 1945-7685
- DOI
- 10.1257/mic.20180190
- Publisher site
- See Article on Publisher Site
Abstract
AbstractIn a market rush, the fear of future adverse price movements causes traders to trade before they become well informed, reducing the informational efficiency of the market. I derive theoretical conditions under which market rushes are equilibrium behavior and study how well these conditions organize trading behavior in a laboratory implementation of the model. Market rushes, including both panics and frenzies, occur more frequently when predicted by theory. However, subjects use commonly discussed, momentum-like strategies that lead to informational losses not predicted by theory, suggesting that these strategies may exacerbate both the occurrence and consequences of panics and frenzies. (JEL C91, D83, G14, G41)
Journal
American Economic Journal Microeconomics – American Economic Association
Published: Aug 1, 2020