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

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  • Poon, Ser-Huang
  • Rockinger, Michael
  • Stathopoulos, Konstantinos
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 30 (2013)
    Issue (Month): C ()
    Pages: 86-97

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    Handle: RePEc:eee:finana:v:30:y:2013:i:c:p:86-97

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Institutional herding; Institutional count; Institutional holdings; Market liquidity; Financial crises;

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