Exogenous shocks can catalyze crashes from "summary" of Why Stock Markets Crash by Didier Sornette
Exogenous shocks can catalyze crashes in financial markets when they trigger a chain reaction of cascading events that lead to a sudden and dramatic downturn. These shocks can come in various forms, such as geopolitical events, natural disasters, or unexpected economic news. When an exogenous shock occurs, it can disrupt the normal functioning of the market and create uncertainty among investors. This uncertainty can lead to panic selling as investors rush to mitigate their losses, causing prices to plummet. As more investors sell off their assets, it can create a domino effect where prices continue to decline rapidly. The impact of an exogenous shock on the market can be amplified by factors such as leverage and herding behavior. When investors have borrowed money to finance their investments, a sharp decline in asset prices can force them to sell off their holdings to meet margin calls, further exacerbating the downward spiral. Additionally, when investors observe others selling off their assets, they may feel compelled to do the same out of fear of missing out on potential gains or in an attempt to limit their losses. Exogenous shocks can also reveal underlying vulnerabilities in the market that have been building up over time. For example, a sudden interest rate hike by the central bank may expose overvalued assets or excessive risk-taking by investors. When these vulnerabilities are exposed, it can trigger a wave of selling that results in a crash.- Exogenous shocks play a crucial role in catalyzing crashes in financial markets by disrupting the status quo and creating a ripple effect of panic and uncertainty among investors. Understanding how these shocks can impact the market is essential for investors and policymakers to better anticipate and mitigate the risks associated with market crashes.
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