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Psychological Aspects of Market Crashes

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  • Patarick Leoni

    (Economics Department, National University of Ireland, Maynooth)

Abstract

This paper analyzes the sensitivity of market crashes to investors'psychology in a standard general equilibrium framwork. Contrary to the traditional view that market crashes are driven by large drops in aggregate endowments, we argue from a theoretical standpoint that individual anticipations of such drops are a necessary condition for crashes to occur, and that the magnitude or such crashes are poritively correlated with the level of individual anticipations of drops

Suggested Citation

  • Patarick Leoni, 2007. "Psychological Aspects of Market Crashes," Economics Department Working Paper Series n1730407, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n1730407
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    File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1730407.pdf
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    References listed on IDEAS

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    1. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
    2. Aloisio Araujo & Alvaro Sandroni, 1999. "On the Convergence to Homogeneous Expectations when Markets Are Complete," Econometrica, Econometric Society, vol. 67(3), pages 663-672, May.
    3. In Ho Lee, 1998. "Market Crashes and Informational Avalanches," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(4), pages 741-759.
    4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    6. Hernandez D., Alejandro & Santos, Manuel S., 1996. "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 102-130, October.
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    Cited by:

    1. Leoni, Patrick L., 2011. "Psychological determinants of occurrence and magnitude of market crashes," Economic Modelling, Elsevier, vol. 28(5), pages 2190-2196, September.
    2. Murphy, Austin, 2012. "Biology-induced effects on investor psychology and behavior," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 20-25.

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