Riding the Bubble: Financial Market Crises in 22 OECD-Countries

• In Event: 282 - Regular Session. Economic Sociology. Financial Globalization

Abstract

In the past decade, the financial markets have been hit twice by crisis, followed each time by recession (Enron, subprime). Three theories are presented to explain the dynamics of share prices: rational expectations, behavioral finance, and an institution-oriented theory. Institutional investors are dominant actors on the financial markets. They hold the majority of the share capital in the big companies. They tend to drive the financial markets to a higher level of risk (volatility). The greater the percentage of the share capital held by institutional investors in a company, the higher the volatility (variance) of the share price. The results of a multilevel analysis confirm this hypothesis (sample of 1,369 firms in 22 OECD countries). There are also significant differences among the OECD countries: whereas both financial market crises originated in the United States, that country did not have the highest level of volatility in the period 2000 to 2013.

Author

• Paul H. Windolf, University Trier