Persistent noise, investors’ expectations, and market meltdowns

Giovanni Cespa, Xavier Vives, 22 April 2014

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The recent financial crisis has revived interest in the question of what triggers crashes and meltdowns in financial markets. An important reason for abrupt and large price dislocations is the lack or ‘slow motion’ of arbitrage capital (Duffie 2010) that weakens the risk-bearing capacity of liquidity providers.

Topics: Financial markets
Tags: asset prices, financial crises, informational efficiency, liquidity, noise trading

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