Crowded trades, market clustering, and price instability

Marc van Kralingen, Diego Garlaschelli, Karolina Scholtus and Iman Lelyveld
Additional contact information
Marc van Kralingen: Aegon N.V.
Diego Garlaschelli: Lorentz Institute
Karolina Scholtus: Erasmus University

No 20-007/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability.

Keywords: crowded trading; tail-risk; financial stability (search for similar items in EconPapers)
JEL-codes: G02 G14 G20 (search for similar items in EconPapers)
Date: 2020-02-04
New Economics Papers: this item is included in nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Crowded trades, market clustering, and price instability (2020)
Working Paper: Crowded trades, market clustering, and price instability (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20200007

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