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Flash Crashes: The Role of Information Processing Based Subordination and the Cauchy Distribution in Market Instability

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  • Parker, Edgar

Abstract

While a wide variety of hypotheses have been offered to explain the anomalous market phenomena known as a “Flash Crash”, there is as of yet no consensus among financial experts as to the sources of these sudden market collapses. In contrast to the behavior expected from standard financial theory, both the equity and bond markets have been thrown into freefall in the absence of any significant news event. The author posits that a combination of probability and information theory, and diffusion dynamics offers a relatively simple explanation of the causes of some of these dramatic events. This new avenue of research also suggests new policies or measures to lower the probability of occurrence and to mitigate the effects of these extreme events.

Suggested Citation

  • Parker, Edgar, 2016. "Flash Crashes: The Role of Information Processing Based Subordination and the Cauchy Distribution in Market Instability," MPRA Paper 80039, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:80039
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    File URL: https://mpra.ub.uni-muenchen.de/80039/1/MPRA_paper_80039.pdf
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    References listed on IDEAS

    as
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    6. J. Doyne Farmer & Laszlo Gillemot & Fabrizio Lillo & Szabolcs Mike & Anindya Sen, 2004. "What really causes large price changes?," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 383-397.
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    Cited by:

    1. Parker, Edgar, 2017. "The Entropic Linkage between Equity and Bond Market Dynamics," MPRA Paper 80036, University Library of Munich, Germany.

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    More about this item

    Keywords

    Subordination; Cauchy Distribution; Flash Crash; High Frequency Trading; Brownian Motion; Information Theory; Financial Engineering;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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