Such a response, while rational from the perspective of individual market participants, may have the collective and unintended consequence of reducing market liquidity at the time when it is most needed. I recognize the relevance of the questions and realize that herding might theoretically occur in a number of markets.
However, based on some observations of how models are actually constructed and used at financial firms, I would like to outline three reasons why this concern might be overstated. First, the sophistication and structure of risk-management models vary widely.