Market Panics, Frenzies, and Informational Efficiency: Theory and Experiment
- (pp. 76-115)
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.
CitationKendall, Chad. 2020. "Market Panics, Frenzies, and Informational Efficiency: Theory and Experiment." American Economic Journal: Microeconomics, 12 (3): 76-115. DOI: 10.1257/mic.20180190
- C91 Design of Experiments: Laboratory, Individual
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]