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Institutional Trades and Herd Behavior in Financial Markets

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Abstract

The article studies the impact of transaction costs on the trading strategy of informed institutional investors in a sequential trading market where traders can choose to transact a large or a small amount of the stock. The analysis shows that high transaction costs may induce informed investors to herd. Moreover, for low levels of transaction costs, informed investors trade both the large and the small quantity of the asset. Finally, if transaction costs are very low and the market width is large enough, informed traders prefer to separate from small liquidity traders.

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File URL: http://www.csef.it/WP/wp215.pdf
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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 215.

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Date of creation: 15 Feb 2009
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Handle: RePEc:sef:csefwp:215

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  1. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
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