A perfect storm in the financial market

This study provides a model explaining how small changes in asset prices may disrupt an entire financial market. Based on the capital asset pricing model (CAPM), our model implies that during a market crash, asset price changes affect the relative distribution of the CAPM betas of individual assets and force all tradable assets to comove. Using US stock market data, our empirical results are consistent with the model's predictions. Overall, the study aids understanding of the price patterns of assets during substantial market downturns, such as financial crises.

Automated summary

This study uses the capital asset pricing model to explain how small changes in asset prices can disrupt an entire financial market, influencing the relative distribution of individual assets and causing all tradable assets to comove during market crashes. Empirical results from US stock market data support the model's predictions, helping to understand price patterns of assets during substantial market downturns such as financial crises.