Endogenous extreme events and the dual role of prices
Danielsson, J.
, Song Shin, H. & Zigrand, J.
(2012).
Endogenous extreme events and the dual role of prices.
Annual Review of Economics,
4, 111-129.
https://doi.org/10.1146/annurev-economics-080511-110930
, Song Shin, H. & Zigrand, J.
(2012).
Endogenous extreme events and the dual role of prices.
Annual Review of Economics,
4, 111-129.
https://doi.org/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.