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Exploring Stock Markets Crashes as Socio-Technical Failures

Author

Listed:
  • Lise Arena

    (Université Côte d'Azur
    GREDEG CNRS)

  • Nathalie Oriol

    (Université Côte d'Azur
    GREDEG CNRS
    Labex Refi)

  • Iryna Veryzhenko

    (LIRSA
    CNAM
    Labex Refi)

Abstract

Based on the integration of two disciplinary fields (MIS and finance), this paper focuses on the micro-foundations of flash crashes, considered as socio-technical failures. A historical analysis allows us to identify four historical periods which each links micro-characteristics (such as speed and volume of traded transactions as well as traders’ technologically-based strategies) to the macro-emergence of extreme phenomena (financial crashes). History is used to calibrate an agent-based model in order to contribute to a better understanding of systemic issues raised by financial institutions and regulatory agencies. Our results contrast with the general opinion that high-frequency traders provoke financial instability because of their use of automated trading based on speed and increasing number of traded transactions. We show that the introduction of heterogeneous high-frequency traders does not necessary amplify the depth of the crash as some of them play a role of liquidity providers and do not follow chartist-based strategies.

Suggested Citation

  • Lise Arena & Nathalie Oriol & Iryna Veryzhenko, 2017. "Exploring Stock Markets Crashes as Socio-Technical Failures," GREDEG Working Papers 2017-04, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2017-04
    Note: To request an electronic copy of this paper, please email the author at Nathalie.ORIOL@gredeg.cnrs.fr.
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