Download This PaperInvestor Heterogeneity and Liquidity
Journal of Financial and Quantitative Analysis, Vol. 57, No. 7, 2022
65 Pages Posted: 10 Feb 2017 Last revised: 28 Oct 2022
Date Written: February 11, 2021
Abstract
Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. Additionally, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity.
Keywords: Liquidity, Volatility of Liquidity, Investor Heterogeneity, Illiquidity Premium
JEL Classification: G12, G23
Suggested Citation: Suggested Citation