Investors' horizons and the Amplification of Market Shocks

Andrew Ellul, Mariassunta Giannetti and Cristina Cella

No 8083, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Fire sales; Institutional investors; Investor horizon; Market crashes; Financial crisis (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G18 G22 (search for similar items in EconPapers)
Date: 2010-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

Downloads: (external link)
https://cepr.org/publications/DP8083 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Investors' Horizons and the Amplification of Market Shocks (2013)
Working Paper: Investors' horizons and the amplification of market shocks (2013)
Working Paper: Investors’ Horizons and the Amplification of Market Shocks
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8083

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8083

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().