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Register a new userCrowded trades, market clustering, and price instability
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Added by
Diego Garlaschelli
Publication date
2020
fields
Financial
and research's language is
English
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No Arabic abstract
Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability.
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This paper presents probability distributions for price and returns random processes for averaging time interval {Delta}. These probabilities determine properties of price and returns volatility. We define statistical moments for price and returns random processes as functions of the costs and the volumes of market trades aggregated during interval {Delta}. These sets of statistical moments determine characteristic functionals for price and returns probability distributions. Volatilities are described by first two statistical moments. Second statistical moments are described by functions of second degree of the cost and the volumes of market trades aggregated during interval {Delta}. We present price and returns volatilities as functions of number of trades and second degree costs and volumes of market trades aggregated during interval {Delta}. These expressions support numerous results on correlations between returns volatility, number of trades and the volume of market transactions. Forecasting the price and returns volatilities depend on modeling the second degree of the costs and the volumes of market trades aggregated during interval {Delta}. Second degree market trades impact second degree of macro variables and expectations. Description of the second degree market trades, macro variables and expectations doubles the complexity of the current macroeconomic and financial theory.
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