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Day Trading: “The Causes of Financial Volatility in the Inelastic Market Assumption”



On that day, traders claimed the right to rebound in US stocks of $9 trillion this year. Some supporting evidence can be found in the latest research.

Even though the retail trade has developed to Representing 20% ​​of daily transaction volume, Wall Street has been trying to figure out how much this moderately sized task force actually affects prices. After all, the market is flooded with algorithmic funds, long managers and so on.

However, a new way of understanding stock volatility through scholars at Harvard University and the University of Chicago made this task easier.

By weighing the sensitivity of various participants to prices, they revealed how individual investors may finally be eye-opening in the world̵

7;s largest stock market.

Related to the daily trader value of five dollars in the new stock theory

New research highlights the insensitivity of large funds and institutions to prices.

The inelastic market hypothesis.

of The study titled “Finding the Root of Financial Volatility: Inelastic Market Hypothesis” is not specifically aimed at retail investors, but the correlation is obvious.

The theory of Xavier Gabaix and Ralph Koijen is that institutional managers are basically insensitive to prices because their buying and selling are mainly driven by their tasks. This has had a huge impact on other investors such as retail funds.

According to their view of inelastic markets, the recent rapid increase in daily trading volume may have an impact many times larger than its absolute scale.

Gabaix and Koijen wrote in their September paper: “The demand of households (including mutual funds and ETFs) is positively correlated with price changes, while the demand of other sectors is significantly negatively correlated with price changes.” They said: “This is related to The inelastic market hypothesis is consistent, in which shocks in the household sector cause price fluctuations.”

The couple wrote that all of this meant that “investing a dollar in the stock market increases the total value of the market by about $5.”

Related to the daily trader value of five dollars in the new stock theory

Not every investor will have a significant impact on prices.

Source: Gabaix and Koijen

The inelastic market hypothesis.

No one can say for sure how much cash individual investors put into the market this year, but the number of accounts on platforms like Robinhood Financial has skyrocketed.

E*Trade Financial Corp., TD Ameritrade Holding Corp. and Charles Schwab Corp. all recorded record signings in the three months ending in March, and have continued to grow since then, with customer transactions in the second quarter exceeding ever before . Robinhood said in May that it will add 3 million new accounts by 2020, half of which are new customers for the first time.

This crazy interest Even if company profits plummeted and the economy stalled due to the pandemic, it still pushed stocks up. On the one hand, even bankrupt companies like Hertz Global Holdings. Sur.

Gabaix and Koijen hope Although Wall Street and academia are doing their best, their methods will eventually become a stepping stone to understand stock trends. This is one of the problems that has been unexplainable for a long time.

Both of them believe that a better starting point is to understand the driving force. This may include everything from the withdrawal of foreign investors to the issuance of new shares to insurance companies that sell shares to raise cash.

The researcher wrote: “The mystery of seemingly random fluctuations in the stock market is difficult to relate to fundamentals, but has been replaced by more manageable issues understood as determinants of liquidity.”

—With the assistance of Sarah Ponczek


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