Market Liquidity and Institutional Trading During the 2007-8 Financial Crisis

Poon, Ser-Huang; Rockinger, Michael; Stathopoulos, Konstantinos

doi:10.2139/ssrn.1868366

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Market Liquidity and Institutional Trading During the 2007-8 Financial Crisis

37 Pages Posted: 20 Jun 2011 Last revised: 22 Aug 2012

See all articles by Ser-Huang Poon

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

There are 2 versions of this paper

Date Written: August 2012

Abstract

This paper shows that institutional sell-side herding increased bid-ask spreads and liquidity risk during the 2007-8 financial crisis. Such an impact on liquidity is most pronounced in firms with large numbers of institutions that sold the same stocks, that is, have correlated trades. For the same reason, we find institutional investors with a dedicated, buy-and-hold, investment style to be the least likely to herd; their trading activity did not affect stock market liquidity during the crisis. Our results are robust to alternative explanations, different test specifications and consistent with recent theories highlighting the negative impact of institutional trading activity on market liquidity during a crisis.

Keywords: Institutional Herding, Institutional Count, Institutional Holdings, Market Liquidity, Financial Crises

JEL Classification: G01, G14, G20

Suggested Citation: Suggested Citation

Poon, Ser-Huang and Rockinger, Georg Michael and Stathopoulos, Konstantinos, Market Liquidity and Institutional Trading During the 2007-8 Financial Crisis (August 2012). Available at SSRN: https://ssrn.com/abstract=1868366 or http://dx.doi.org/10.2139/ssrn.1868366