Price crashes in the model depend on whether traders know insurers’ selling rule.

Evidence

Because portfolio insurance can create positive feedback (as the price of the risky asset falls, portfolio insurers will sell more of it), price discontinuities or `crashes’ can occur” (Gennotte and Leland 1990, p. 1008). The main determinant of their likelihood in Gennotte and Leland’s model is whether or not 7t(po), the function describing the extent of portfolio insurers’ sales at different price levels, is known to the economic agents posited by the model. (The possibility that it(po) is known to no participant is the key departure from a full rational-expectations model.) — Donald MacKenzie, An Engine, Not a Camera, 868

Categorization

• XREF: connects to: The log-normal assumption may have been self-undermining through portfolio insurance. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 191