What is a financial crash?

Abstract

What is a financial crash, and why does it happen? The answers to these fundamental questions require an investigation of the ontological and epistemic state of the financial markets which will identify the causes of a financial crash, the entities involved, and the relations between them.To this end, I examine several theories on financial systems which have conceptualized financial crashes. I analyze how these theories: a) identify different causes of a crash; b) deal with the basic entities and units of analysis; c) define what we can know about those causes and entities, and what they can reveal about an impending crash. On this basis, I outline some ontological and epistemic preconditions that are necessary for a financial crash to occur. I also examine an example of a price drop on the stock market and the role played by the epistemic and ontic states of the market in that event.

Keywords

• philosophy of finance
• financial crash
• algorithms