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Stock price fragility

Author

Listed:
  • Robin Greenwood

    (Harvard Business School - Harvard University, NBER - The National Bureau of Economic Research)

  • David Thesmar

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, CEPR - London Business School)

Abstract
We study the relation between the ownership structure of financial assets and non-fundamental risk. We define an asset to be fragile if it is susceptible to non-fundamental shifts in demand. An asset can be fragile because of concentrated ownership, or because its owners face correlated or volatile liquidity shocks, i.e., they must buy or sell at the same time. We formalize this idea and apply it to mutual fund ownership of US stocks. Consistent with our predictions, fragility strongly predicts price volatility. We then extend the logic of fragility to investigate two natural extensions: (1) the forecast of stock return comovement and (2) the potentially destabilizing impact of arbitrageurs on stock prices.

Suggested Citation

  • Robin Greenwood & David Thesmar, 2011. "Stock price fragility," Post-Print hal-00635979, HAL.
    • Handle: RePEc:hal:journl:hal-00635979
    DOI: 10.1016/j.jfineco.2011.06.003
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    mutual funds; flow-driven trading; non-fundamental risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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