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Shvoong Home>Social Sciences>Economics>Market Crashes without External Shocks Summary

Market Crashes without External Shocks

Article Summary   by:Limonad     Original Authors: Hart and Tauman; 2002
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Market crash is usually considered an indication that the fundamentals of the economy have changed and recession is around the corner. This however need not be so. For instance, in October 1987 Wall Street lost over 20% of its value in one day, but this was not followed by a recession. Moreover, in the days preceding the crash, there were no significant external events or bad news" that could justify the dramatic price fall. We argue here that market crashes (and, similarly, market bubbles) may well be the result of information processing by the participants|and nothing else. Moreover, in terms of market observables, it looks as if nothing is really changing. Still, underneath the surface, there is a gradual updating of information by the participants. Then, at a certain point in time, this causes a sudden change of behavior.
Published: August 19, 2007   
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