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Why do stocks fall so quickly? China's market is down 40% in the past month ,for example. But when you look at charts of individual stocks, you see many instances of stocks giving up months of weeks of gains on very little relative volume and in a very small duration of time.

The question is why does this happen, besides the predictable 'greed/fear' explanation, which does not take into account market micro structure.

My belief that is on longer time-frames while the stock market does exhibit the classic GBM zig-zags, when you zoom in much closer there are lots of jumps which when can reduced to fundamental discrete units, violating self-similarity. The discretization of the microstructure causes huge swings in the short-run, but over the longer-run it smooths out.

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  • $\begingroup$ If you found one of the answers helpful it would be great if you could upvote and accept it - Thank you :-) $\endgroup$
    – vonjd
    Commented Jul 30, 2015 at 8:03

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Stock market indices fall faster than they rise, in part, due to leveraged long investors. As individual stocks fall, investors must de-risk due to margin calls, and those margin calls may need to be met by selling other stocks. This causes correlations to increase as markets fall. This also causes indices to fall more quickly than they rise, since the dispersion narrows in declines.

Long story short, a big part is leverage-induced contagion.

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    $\begingroup$ Can you back that up somehow or is this just your assumption/interpretation? $\endgroup$
    – vanguard2k
    Commented Jul 17, 2015 at 8:48
  • $\begingroup$ Not apart from the dozens (hundreds?) of papers that have been written on the subject. $\endgroup$
    – experquisite
    Commented Jul 18, 2015 at 18:09
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    $\begingroup$ Great! You could cite a seminal paper youve read and explain why it backs your answer. This would improve your answer a great deal because the OP (and me, too) could check it himself. Dont get me wrong: Almost anyone will have heard of this effect but hardly noone has taken time to verify it for himself (especially for Chinese stocks I would say). $\endgroup$
    – vanguard2k
    Commented Jul 20, 2015 at 8:45
  • $\begingroup$ @vanguard2k It is an assumption. What about leveraged short investors, who must de-risk due to margin calls, and they meet those calls by covering their shorts, which drive markets higher. If there are dozens of papers, then it will be easy for experquisite to cite a few of them. $\endgroup$
    – pacoverflow
    Commented Aug 23, 2021 at 16:11
  • $\begingroup$ Honestly I’m not going to bother, I’m not your research assistant. $\endgroup$
    – experquisite
    Commented Aug 24, 2021 at 18:52
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So basically your question boils down to: How can markets be non-normal in the short run but (more) normal in the long run?

The answer to that lies in the fact that certain assumptions of normality are not satisfied in the short run, one of them being independence. In the short run returns are just not independent (think e.g. volatility clustering) because the situations that lead to the respective behaviour of markets has at least some persistence in reality and information flow and processing is just not infinitely fast (and will never be).

In the long run those assumptions are better justifiable - the memory of markets (and people!) is just not that long which leads to a more normal behaviour.

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  • $\begingroup$ @vobjd can you please recommend an asset pricing book that will take this into account? $\endgroup$
    – mugen
    Commented Jul 18, 2015 at 17:12
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Greed/fear and leveraged long investors accelerates the fall in deed. But remember for every tick the mkt advances, someone is putting money at stake, for prices to fall nobody has to put up any money. Law of relativity..

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The above answers explain why markets fall, but not how it actually happens. Just guessing because I avoid buying/selling stocks on volatile days, but I think people are selling large numbers of shares at "market value" when the bid/ask spread is much wider than normal.

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  • $\begingroup$ Your opinion is somewhat ambiguous. Could improve answer by stating opinion more directly. For example: "I suspect the reason is due to a positive feedback loop to volatility shocks. This phenomenon is plausibly caused by traders greater volumes of market orders (versus limits, etc...) when the bid/ask spread is much wider than normal." $\endgroup$
    – David Addison
    Commented Feb 11, 2018 at 21:43

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