Endogenous extreme events and the dual role of prices
Download paperDanielsson, J., H. Shin, and J.-P. Zigrand (2012). Endogenous extreme events and the dual role of prices. Annual Reviews 4.
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.
@article{DanielssonShinZigrand2011a, title={Endogenous extreme events and the dual role of prices}, author={J{\'o}n Dan{\'i}elsson and Hyun Shin and Jean--Pierre Zigrand}, year=2012, journal={Annual Reviews}, volume=4, url={www.RiskResearch.org}, abstract={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.}, }
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