When Everyone Runs for the Exit

23 Pages Posted: 7 Oct 2009

See all articles by Lasse Heje Pedersen

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

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Date Written: August 2009

Abstract

The dangers of shouting "fire" in a crowded theater are well understood, but the dangers of rushing to the exit in the financial markets are more complex. Yet, the two events share several features, and I analyze why people crowd into theaters and trades, why they run, what determines the risk, whether to return to the theater or trade when the dust settles, and how much to pay for assets (or tickets) in light of this risk. These theoretical considerations shed light on the recent global liquidity crisis and, in particular, the quant event of 2007.

Keywords: asset pricing, crisis, liquidity risk, quant, risk management, run, unconventional monetary policy

JEL Classification: E2, E44, E52, G1, G11, G12, G2

Suggested Citation

Pedersen, Lasse Heje, When Everyone Runs for the Exit (August 2009). CEPR Discussion Paper No. DP7436, Available at SSRN: https://ssrn.com/abstract=1484468

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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