Stock Sale Induced by Anxiety in the Face of Risk

Abstract

It is observed that stock price fluctuations are slowly in upward phases like bubble, but fast in downward phases like its burst. This paper provides a new theoretical explanation of this phenomenon, especially why stock price drops sharply, based on the timing of stock sales. Investors tend to be more risk averse when the timing of decision making is closer for the present. This tendency can explain that the timing of stock sales is different according to risk aversion. When investors become excessive risk averse, they tend to sell stocks more in the present. This result is consistent with asymmetric patterns of stock price fluctuation when investors are moderate risk averse in normal economic conditions, but excessive risk averse in abnormal economic condition like the fear of financial crises.