Institutional Investors and Stock Market Volatility

Xavier Gabaix, Parameswaran Gopikrishnan, Vasiliki Plerou and H. Eugene Stanley

The Quarterly Journal of Economics, 2006, vol. 121, issue 2, 461-504

Abstract: We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets. Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals. We derive the optimal trading behavior of these investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.

Date: 2006
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Working Paper: Institutional Investors and Stock Market Volatility (2005)
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