Unknown mechanical selling amplifies price falls by triggering downward expectation revisions.

Evidence

Sales of the asset by portfolio insurers will lead to lower prices, but if Tc(p°) is not known in other words, if investors do not know the proportion of sales that are “mechanical” responses to lower prices price falls will be greater “as a consequence of investors inferring information from prices. A supply shock leads to lower prices, which in turn (since the shock is unobserved) leads uninformed investors to revise their expectations downward. This limits these investors’ willingness to absorb the extra supply and causes a magnified price response” (Gennotte and Leland 1990, p. 1001). — Donald MacKenzie, An Engine, Not a Camera, 869

Categorization

• DEEPTHINKING: The mechanism — an unobserved supply shock being misread as an information signal, turning bystanders from buyers into sellers — is a subtle informational-cascade dynamic with wide applicability, not just finance.
• XREF: connects to: Portfolio insurance sells more stock as price falls, creating mechanical downward supply. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 867; Unknown size of scheduled portfolio sales, not the sales themselves, caused market shock. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 883; Sudden margin hikes can trigger forced sales that amplify the very volatility causing them — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 941 (+1 more)

Broader Connections

• Portfolio insurance sells more stock as price falls, creating mechanical downward supply. #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 867
• Unknown size of scheduled portfolio sales, not the sales themselves, caused market shock. #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 883
• Sudden margin hikes can trigger forced sales that amplify the very volatility causing them #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 941
• A small trigger can unravel large systems of overlapping arbitrage positions through forced selling #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 156