Investors' Horizons and the Amplification of Market Shocks

57 Pages Posted: 29 Nov 2010

See all articles by Cristina Cella

Cristina Cella

Sverige Riksbank; Stockholm School of Economics; Swedish House of Finance; Centre for Studies in Economics and Finance (CSEF); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2010

Abstract

After negative shocks, investors with short trading horizons are inclined or forced to sell their holdings to a larger extent than investors with longer trading horizons. This may amplify the effects of market-wide shocks on stock prices. We test the relevance of this mechanism by exploiting the negative shock caused by Lehman Brothers' bankruptcy in September 2008. Consistent with our conjecture, we find that short-term investors sell significantly more than long-term investors around and after the Lehman Brothers' bankruptcy. Most importantly, we show that stocks held by short- term institutional investors experience more severe price drops and larger price reversals than those held by long-term investors. Since they are obtained after controlling for the stocks' exposure to volatility, various firms' and investors' characteristics, including the momentum effect and the propensity of institutional investors to follow an index, our results cannot be explained by characteristics of the institutions' investment styles other than their investment horizons. We also show that the effect of shareholder trading horizon emerges during other large market declines. Overall, the empirical evidence strongly indicates that investors' short horizons amplify the effects of market-wide negative shocks.

Keywords: financial crisis, fire sales, institutional investors, investor horizon, market crashes

JEL Classification: G11, G12, G14, G18, G22

Suggested Citation

Cella, Cristina and Ellul, Andrew and Giannetti, Mariassunta, Investors' Horizons and the Amplification of Market Shocks (October 2010). CEPR Discussion Paper No. DP8083, Available at SSRN: https://ssrn.com/abstract=1714855

Cristina Cella (Contact Author)

Sverige Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Swedish House of Finance ( email )

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Sweden

Centre for Studies in Economics and Finance (CSEF) ( email )

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Italy

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
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Italy

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance ( email )

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United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Belgium

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Mariassunta Giannetti

Stockholm School of Economics ( email )

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HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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