title: Why Do Markets Crash? Bitcoin Data Offers Unprecedented Insights.
abstract: Crashes have fascinated and baffled many canny observers of financial markets. In the strict orthodoxy of the efficient market theory, crashes must be due to sudden changes of the fundamental valuation of assets. However, detailed empirical studies suggest that large price jumps cannot be explained by news and are the result of endogenous feedback loops. Although plausible, a clear-cut empirical evidence for such a scenario is still lacking. Here we show how crashes are conditioned by the market liquidity, for which we propose a new measure inspired by recent theories of market impact and based on readily available, public information. Our results open the possibility of a dynamical evaluation of liquidity risk and early warning signs of market instabilities, and could lead to a quantitative description of the mechanisms leading to market crashes.
authors.affiliation: Capital Fund Management, 23-25 Rue de l'Université, 75007 Paris, France; Laboratoire de Probabilités et Modèles Aléatoires, Université Pierre et Marie Curie (Paris 6), 4 Place Jussieu, 75005 Paris, France; Ecole des Mines ParisTech, 60 Boulevard Saint-Michel, 75006 Paris, France.
authors.forename: Jonathan
authors.initials: J
authors.lastname: Donier
authors.affiliation: Capital Fund Management, 23-25 Rue de l'Université, 75007 Paris, France; CFM-Imperial Institute of Quantitative Finance, Department of Mathematics, Imperial College, 180 Queen's Gate, London SW7 2RH, United Kingdom.
authors.forename: Jean-Philippe
authors.initials: JP
authors.lastname: Bouchaud
mesh_terms: D003132:Commerce / Q000639:trends*; D018803:Models, Economic