A perfect storm in the financial market |
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| Affiliation: | 1. School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 156-756, South Korea;2. School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 156-756, South Korea;3. John B. and Lillian E. Neff Department of Finance, John B. and Lillian E. Neff College of Business and Innovation, University of Toledo, 2801 W Bancroft Rd, Toledo, OH 43606, USA |
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| Abstract: | This study provides a model explaining how small changes in asset prices may disrupt an entire financial market. Based on the capital asset pricing model (CAPM), our model implies that during a market crash, asset price changes affect the relative distribution of the CAPM betas of individual assets and force all tradable assets to co-move. Using US stock market data, our empirical results are consistent with the model’s predictions. Overall, the study aids understanding of the price patterns of assets during substantial market downturns, such as financial crises. |
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| Keywords: | Capital asset pricing model Beta distribution Market crash Financial crisis |
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