Johnson's Maureen O'Hara teams up with Cornell professor to control future "flash crashes"

12/1/2010 1:53:00 PM

Johnson-Cornell alliance generates metric to predict and possibly prevent future sudden & significant stock market dives

Reported by the Cornell Chronicle, Dec. 1, 2010

Stock market 'flash' crashes now predictable, thanks to Cornell-developed metric

The May 6, 2010 stock market crash briefly erased almost $1 trillion in value and plunged the Dow Jones Industrial Average into its biggest intraday fall ever. The market recovered most of its losses within the hour, but the crash left the financial world reeling.

This kind of "flash crash" is now predictable, and possibly preventable, thanks to a new formula developed by David Easley, the Henry Scarborough Professor of Social Sciences and chair of the Department of Economics, and Maureen O'Hara, the Robert W. Purcell Professor of Finance at the Johnson School, in collaboration with Marcos Lopes de Prado of Tudor Investments.

The new so-called volume-synchronized probability of informed trading (VPIN) metric looks at the imbalance of trade relative to the total volume of the market. It identifies flow toxicity, which Easley and O'Hara have been researching for about 20 years.

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