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You Need Three Butterflies to Cause a Hurricane

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  • Gianluca Piero Maria Virgilio

Abstract

The aim of this study is verifying the impact of high volatility, scarce liquidity and stop-loss orders on abnormal events like the May 6, 2010 Flash Crash. The paper assumes those three factors to be the main drivers, proposes a mathematical model based upon them and analyses audit trail data to verify whether those factors actually were at the origin of that event. It uses the concept of 'run', an uninterrupted sequence of trades all occurring in the same direction and compares volatility, liquidity and occurrence of stop-loss orders over the analysis period. The results found provide suggestive evidence that a combination of the three factors contributed to the crash. Each of them, taken individually, does not usually lead to extreme behaviours. Even two factors together may not disturb the orderly functioning of the markets but the combination of volatility, scarce liquidity and stop-loss orders may lead to a crisis. JEL Codes - G12

Suggested Citation

  • Gianluca Piero Maria Virgilio, 2020. "You Need Three Butterflies to Cause a Hurricane," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67(1), pages 139-155, March.
    • Handle: RePEc:aic:saebjn:v:67:y:2020:i:1:p:139-155:n:6
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    File URL: http://saeb.feaa.uaic.ro/index.php/saeb/article/view/1162
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    References listed on IDEAS

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    1. Didier SORNETTE & Susanne VON DER BECKE, 2011. "Crashes and High Frequency Trading," Swiss Finance Institute Research Paper Series 11-63, Swiss Finance Institute.
    2. Didier SORNETTE & Susanne VON DER BECKE, 2011. "Crashes and High Frequency Trading," Swiss Finance Institute Research Paper Series 11-64, Swiss Finance Institute.
    3. Anderson, Nicola & Webber, Lewis & Noss, Joseph & Beale, Daniel & Crowley-Reidy, Liam, 2015. "Financial Stability Paper 34: The resilience of financial market liquidity," Bank of England Financial Stability Papers 34, Bank of England.
    4. Giovanni Cespa & Thierry Foucault, 2014. "Illiquidity Contagion and Liquidity Crashes," The Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1615-1660.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Flash Crash; abnormal market events; volatility; liquidity; stop-loss orders;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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