The Inelastic Market Hypothesis explains the volatility in the stock market, also explains why stock market crashes are usually so sharp and fast. Plus, you might not believe it, but YOU are the reason behind stock market crashes as households, with their flows, drive the market.

The Inelastic Market Hypothesis, developed by professor Gabaix and Kooijen, from Harvard and Booth respectively, shows how 30% of stock market fluctuations can be explained by flows. This confirms the thesis that you and me, drive the markets and also explains the risks as our selling drives crashes.
Thanks to the market's in-elasticity, $1 dollar invested, increases the value of the market by $5 because there simply isn't enough supply to make markets efficient. The opposite also holds.
Inelastic Market Hypothesis content

0:00 Inelastic Market Hypothesis
3:56 Inelastic Market Nature
6:10 You Make Stocks Crash
9:10 Importance
11:28 Investing Conclusion
14:27 Market Can Double

The four pillars of the Inelastic Market Hypothesis are that:
- institutional funds have rigid constrains and can't really do much
- hedge funds own only 5% of the market, thus can't balance the remaining 95%
- risk isn't transferred among sectors
- markets are less efficient on the macro level than on the micro

The Inelastic Market Hypothesis is important as it explains market volatility, why markets crash but also as it helps understand the impact of buybacks, government intervention and other factors impacting the stock market. As for investing, imagine what $1 invested does with low volume stocks or shallow markets.
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SSRN article on the Inelastic Market Hypothesis - https://papers.ssrn.com/sol3/papers.c...

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