A QWAFAFEW discussion arranged by Evan Schulman and led by

Carol Osler

Abstract
What triggers market crashes? This paper highlights four properties of price-contingent trading that contribute to fat tails in exchange-rate returns and provides first estimates of their relative importance. Price-contingent trading, which is common across financial markets, includes algorithmic trading, technical trading, and dynamic option hedging. The factors of such trading we connect to fat tails are: (1) high kurtosis in the distribution of order sizes; (2) clustering of trades within the day; (3) clustering of trades at certain prices; and (4) feedback between trading and returns. Calibrated simulations indicate that order-size distribution has the biggest influence on fat tails but most important are the interactions among factors.