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Financial Market Dislocations

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  • Paolo Pasquariello

Abstract

Dislocations occur when financial markets, operating under stressful conditions, experience large, widespread asset mispricings. This study documents systematic dislocations in world capital markets and the importance of their fluctuations for expected asset returns. Our novel, model-free measure of these dislocations is a monthly average of hundreds of individual abnormal absolute violations of three textbook arbitrage parities in stock, foreign exchange, and money markets. We find that investors demand statistically and economically significant risk premiums to hold financial assets performing poorly during market dislocations, that is, when both frictions to the trading activity of speculators and arbitrageurs and their marginal utility of wealth are likely to be high.

Suggested Citation

  • Paolo Pasquariello, 2014. "Financial Market Dislocations," The Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1868-1914.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:6:p:1868-1914.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu007
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