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| Author: | Gabaix, X. (et al.) |
| Title: | A theory of limited liquidity and large investors causing spikes in stock market volatility and trading volume |
| Journal: | Journal of the European Economic Association
2007 : APR/MAY, VOL. 5:2-3, p. 564-573 |
| Index terms: | finance stock markets volatility trading volumes market theory probability |
| Language: | eng |
| Abstract: | This paper deals with a theory of the economic underpinnings of the fat-tailed (here as: f-t.) distributions (as: dstrs.) of a number of financial variables, e.g. returns and trading volumes. It is posited that they have a common origin in the strategic trading behaviour of very large financial institutions in a relatively illiquid market. It is shown how the f-t. dstrs. of fund sizes can indeed generate extreme returns and volumes, even in the absence of fundamental news. In addition, it is possible to replicate the individually different empirical values of the power law exponents for each distribution etc. |
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