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Thursday, October 15, 2020 | History

2 edition of Differences of opinion, rational arbitrage and market crashes found in the catalog.

Differences of opinion, rational arbitrage and market crashes

Harrison G. Hong

Differences of opinion, rational arbitrage and market crashes

by Harrison G. Hong

  • 111 Want to read
  • 4 Currently reading

Published by National Bureau of Economic Research in Cambridge, MA .
Written in English

    Subjects:
  • Stock exchanges and current events.,
  • Financial crises.,
  • Contagion (Social psychology) -- Economic aspects.,
  • Stocks -- Prices.,
  • Information measurement -- Economic aspects.,
  • Arbitrage.

  • Edition Notes

    StatementHarrison Hong, Jeremy C. Stein.
    SeriesNBER working paper series -- no. 7376, Working paper series (National Bureau of Economic Research) -- working paper no. 7376.
    ContributionsStein, Jeremy C., National Bureau of Economic Research.
    The Physical Object
    Pagination44 p. :
    Number of Pages44
    ID Numbers
    Open LibraryOL22393999M

    not-fully-rational investors from influencing security prices by trading mispriced securities through a process called arbitrage. Therefore in an efficient market, there should be no arbitrage opportunities because competition will drive prices to their correct values.   This is chronicled in my colleague Justin Fox’s excellent book, “The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.” Though Fama did empirical research.

      In this paper we examine the relation between equity mispricing and arbitrage risk and find that stocks with high arbitrage risk have higher estimated mispricing than stocks with low arbitrage risk. These results are not limited to high book-to-market or small capitalization stocks, and they are not sensitive to transaction and short-selling costs.   In their paper, “Differences of Opinion, Rational Arbitrage and Market Crashes,” Hong and Stein propose the following model. 14 Efficient Market Hypothesis And Behavioral Finance—Is A Compromise In Sight? There are two investors, A and B, and a class of fully rational.

    If market clearing prices allow no arbitrage opportunities, then the current price of each asset must equal the weighted average of the current prices of the fundamental assets. The Arrow-Debreu intuition can be couched in terms of returns and expected re-turns rather than payoffs and prices. If the unexpected part of each asset’s return. Japanese Real Estate Stock Market Bubble of s s Japan asset prices rose rapidly Japanese stocks: sold at 60x earnings, total market value of $4 trillion, almost value of all U.S. equities, and close to 45% world’s equity-market capitalization Real estate boom, value of real estate increased more than 75 times.


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Differences of opinion, rational arbitrage and market crashes by Harrison G. Hong Download PDF EPUB FB2

Differences of Opinion, Rational Arbitrage and Market Crashes Harrison Hong, Jeremy C. Stein. NBER Working Paper No. Issued in October NBER Program(s):Asset Pricing We develop a theory of stock-market crashes based on differences of opinion among investors.

Get this from a library. Differences of opinion, rational arbitrage, and market crashes. [Harrison G Hong; Jeremy C Stein; National Bureau of Economic Research.].

helpful comments and suggestions. This article was previously circulated under the title “Differences of Opinion, Rational Arbitrage and Market Crashes.” Address correspondence to: Harrison Hong, Department of Economics, Princeton University, Princeton, NJor e-mail: [email protected] Differences of Opinion, Rational Arbitrage and Market Crashes.

Harrison Hong and Jeremy Stein (). NoNBER Working Papers from National Bureau of Economic Research, Inc Abstract: We develop a theory of stock-market crashes based on differences of opinion among investors. Because of short-sales constraints, bearish investors do not initially participate in the market rational arbitrage and market crashes book their information Cited by: Downloadable.

We develop a theory of stock-market crashes based on differences of opinion among investors. Because of short-sales constraints, bearish investors do not initially participate in the market and their information is not revealed in prices.

However, if other, previously-bullish investors have a change of heart and bail out of market, the originally-more-bearish group may become the. Differences of Opinion, Rational Arbitrage and Market Crashes By Harrison Hong and Jeremy C. Stein Get PDF ( KB).

Differences of Opinion, Rational Arbitrage and Rational arbitrage and market crashes book Crashes NBER Working Paper No. w Number of pages: 50 Posted: 14 Jul Last Revised: 14 Oct Therefore, if one assumes that the market factor is itself a traded asset, and that our model can be applied directly to it, the result about increased cross-stock correlations in a downturn will follow (at short horizons) so long as there are sufficient differences of opinion about the market factor that the conditions of Proposition 3 apply.

"Differences of Opinion, Rational Arbitrage and Market Crashes", (with Harrison Hong), September "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices ", (with Joseph Chen and Harrison Hong), November Hong, H.

and Stein, J. () Differences of opinion, rational arbitrage and market crashes. Review of Financial Studies, – CrossRef Google Scholar. We develop a theory of market crashes based on differences of opinion among investors. Because of short-sales constraints, bearish investors do not initially participate in the market and their.

Differences of Opinion, Rational Arbitrage and Market Crashes,” Working paper, (). Differential Interpretations and Trading Volume,”. Using a limit-order-book market, we develop a simple framework to model the dynamics of supply/demand and its impact on execution cost.

Differences of Opinion, Rational Arbitrage and Market. "Differences of Opinion, Rational Arbitrage and Market Crashes" Discussant: Olivier Blanchard, Harvard University and NBER. William Goetzmann, Yale University and NBER and Massimo Massa, INSEAD "Index Funds and Stock Market Growth" Discussant: Andrew Metrick, Harvard University and NBER.

Jeff Wurgler and Ekaterina Zhuravskaya, Harvard University. rational investors, or arbitrageurs as they are often called, are not as aggressive in forcing prices to fundamentals as the standard model would suggest.

In the language of modern behavioral finance, there are limits to arbitrage. Recent stock market history has. "Differences of Opinion, Rational Arbitrage and Market Crashes," NBER Working PapersNational Bureau of Economic Research, Inc.

Franklin Allen & Stephen Morris & Andrew Postlewaite, "undated". " Finite Bubbles with Short Sale Constraints and Asymmetric Information (Reprint )," Rodney L.

White Center for Financial Research Working. market with heterogeneous expectations, Quarterly Journal of Econom [Zheng Sun, 10/7] – Hong and Stein (), Differences of Opinion, Rational Arbitrage, and Market Crashes, forthcoming, Review of Financial Studies.

– Miller (), Risk, Uncertainty, and Divergence of Opinion, Journal of Fina – 3. 1. Introduction. March saw one of the most dramatic stock market crashes in history.

In barely four trading days 2, Dow Jones Industrial Average (DJIA) plunged 6, points, an equivalent of roughly 26%.The crash was caused by government's reaction to a novel coronavirus (COVID), a disease which originated in the Chinese city of Wuhan in December and quickly spread around.

"Differences of Opinion, Short-Sales Constraints and Market Crashes" (w/ Jeremy C. Stein, Harvard University) Review of Financial Studies, Summer (Previously circulated as "Differences of Opinion, Rational Arbitrage and Market Crashes") Because of these limits, trading against a mispricing isn’t true arbitrage, because, as economist and investor John Maynard Keynes is said to have quipped, “the market can stay irrational longer than you can stay solvent.” In the wake of the stock market crash, economists pushed back strongly against the idea of efficient markets.

Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices NBER Working Papers, National Bureau of Economic Research, Inc View citations (29) See also Journal Article in Journal of Financial Economics () Differences of Opinion, Rational Arbitrage and Market Crashes.

SPRD is the average bid-ask spread, which is calculated as the difference between ask and bid prices, scaled by the mid-quote. LNBM: LNBM is the logarithm of the book value divided by the market value at the previous year-end.

LNMV: LNMV is the logarithm of the market value of equity at the previous year-end. R (−12,−2).Differences of Opinion, Rational Arbitrage and Market Crashes with Jeremy C. Stein: w Published: Hong, Harrison and Jeremy C.

Stein. "Differences Of Opinion, Short-Sales Constraints, And Market Crashes," Review of Financial Studies,v16(2,Summer), May