Market liquidity and institutional trading during the 2007–8 financial crisis

Ser-Huang Poon, Michael Rockinger () and Konstantinos Stathopoulos

International Review of Financial Analysis, 2013, vol. 30, issue C, 86-97

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 (search for similar items in EconPapers)
JEL-codes: G01 G11 G20 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:30:y:2013:i:c:p:86-97

DOI: 10.1016/j.irfa.2013.06.003

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