Market panics, frenzies, and informational efficiency: Theory and experiment
- American Economic Journal Microeconomics
- 12(3), Aug, 2020: p. 76-115
In 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. - Reproduced
Information and Market Efficiency; Event Studies; Insider Trading