Abstract

We use market microstructure invariance, as developed by Kyle and Obizhaeva (2011a), to examine the price impact and frequency of large stock market sales documented for the following stock market crash events: the stock market crash late of October 1929; the stock market crash of October 19, 1987; the sales of George Soros on October 22, 1987; the liquidation of Jerome Kerviel’s rogue trades by Socit Gnrale in January 2008; and the flash crash of May 6, 2010. Actual price declines are similar in magnitude to declines predicted based on parameters estimated from portfolio transitions data by Kyle and Obizhaeva (2011b). The two flash crash events had larger price declines than predicted, with immediate rapid V-shape recoveries. The slower moving 1929 crash had smaller price declines than predicted. Reconciling the predicted frequency of crashes to observed frequencies requires the distribution of quantities sold either to have fatter tails than a log-normal or a larger variance than estimated from portfolio transitions data. Using data available to market participants before these crash events, microstructure invariance leads to reasonable predictions of the impact of these systemic crash events.