Why Leveraged Markets Can Fall Faster Than They Rise

# Why do stocks fall so quickly? Technical explanations


# Why do stocks fall so quickly? Technical explanations












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.

## Answer by experquisite (score 6)

https://quant.stackexchange.com/a/18802

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.

## Answer by vonjd (score 5)

https://quant.stackexchange.com/a/18792

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.

## Answer by cJc (score 1)

https://quant.stackexchange.com/a/18906

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..

## Answer by James A (score -2)

https://quant.stackexchange.com/a/38190

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.