32 research outputs found
Why Do Markets Crash? Bitcoin Data Offers Unprecedented Insights
Crashes have fascinated and baffled many canny observers of financial
markets. In the strict orthodoxy of the efficient market theory, crashes must
be due to sudden changes of the fundamental valuation of assets. However,
detailed empirical studies suggest that large price jumps cannot be explained
by news and are the result of endogenous feedback loops. Although plausible, a
clear-cut empirical evidence for such a scenario is still lacking. Here we show
how crashes are conditioned by the market liquidity, for which we propose a new
measure inspired by recent theories of market impact and based on readily
available, public information. Our results open the possibility of a dynamical
evaluation of liquidity risk and early warning signs of market instabilities,
and could lead to a quantitative description of the mechanisms leading to
market crashes