IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v47y2019icp184-209.html
   My bibliography  Save this article

Liquidity shocks and institutional investors

Author

Listed:
  • Dang, Tung Lam
  • Moshirian, Fariborz
  • Zhang, Bohui

Abstract

This paper investigates the role of institutional investors in amplifying market liquidity shocks during the global financial crisis of 2008–2009. We find that stocks with high pre-crisis institutional ownership experienced significant institutional holding reductions and larger price reductions during the crisis period. More importantly, this effect is pronounced for stocks with greater liquidity exposure to market liquidity shocks. Further analysis reveals that the institutional investors’ contribution to the amplification of liquidity shocks clusters primarily on non-block and/or independent institutional investors, who were more likely to encounter liquidity constraints during the crisis.

Suggested Citation

  • Dang, Tung Lam & Moshirian, Fariborz & Zhang, Bohui, 2019. "Liquidity shocks and institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 184-209.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:184-209
    DOI: 10.1016/j.najef.2018.12.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940818304297
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2018.12.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Raddatz, Claudio & Schmukler, Sergio L., 2012. "On the international transmission of shocks: Micro-evidence from mutual fund portfolios," Journal of International Economics, Elsevier, vol. 88(2), pages 357-374.
    2. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, European Finance Association, vol. 8(1), pages 1-18.
    3. Tarun Chordia & Richard Roll & Avanidhar Subrahmanyam, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    4. Manconi, Alberto & Massa, Massimo & Yasuda, Ayako, 2012. "The role of institutional investors in propagating the crisis of 2007–2008," Journal of Financial Economics, Elsevier, vol. 104(3), pages 491-518.
    5. Brian H. Boyer & Tomomi Kumagai & Kathy Yuan, 2006. "How Do Crises Spread? Evidence from Accessible and Inaccessible Stock Indices," Journal of Finance, American Finance Association, vol. 61(2), pages 957-1003, April.
    6. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    7. Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
    8. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
    9. Sadka, Ronnie, 2010. "Liquidity risk and the cross-section of hedge-fund returns," Journal of Financial Economics, Elsevier, vol. 98(1), pages 54-71, October.
    10. Antonio E. Bernardo & Ivo Welch, 2004. "Liquidity and Financial Market Runs," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 135-158.
    11. Dang, Tung Lam & Moshirian, Fariborz & Zhang, Bohui, 2015. "Commonality in news around the world," Journal of Financial Economics, Elsevier, vol. 116(1), pages 82-110.
    12. Hui Tong & Shang-Jin Wei, 2011. "The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2023-2052.
    13. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
    14. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    15. Goldstein, Itay & Pauzner, Ady, 2004. "Contagion of self-fulfilling financial crises due to diversification of investment portfolios," Journal of Economic Theory, Elsevier, vol. 119(1), pages 151-183, November.
    16. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    17. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    18. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
    19. Broner, Fernando A. & Gaston Gelos, R. & Reinhart, Carmen M., 2006. "When in peril, retrench: Testing the portfolio channel of contagion," Journal of International Economics, Elsevier, vol. 69(1), pages 203-230, June.
    20. Poon, Ser-Huang & Rockinger, Michael & Stathopoulos, Konstantinos, 2013. "Market liquidity and institutional trading during the 2007–8 financial crisis," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 86-97.
    21. Teo, Melvyn, 2011. "The liquidity risk of liquid hedge funds," Journal of Financial Economics, Elsevier, vol. 100(1), pages 24-44, April.
    22. Lai, Sandy & Ng, Lilian & Zhang, Bohui, 2014. "Does PIN affect equity prices around the world?," Journal of Financial Economics, Elsevier, vol. 114(1), pages 178-195.
    23. Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
    24. Harald Hau & Sandy Lai, 2017. "The Role of Equity Funds in the Financial Crisis Propagation," Review of Finance, European Finance Association, vol. 21(1), pages 77-108.
    25. Allaudeen Hameed & Wenjin Kang & S. Viswanathan, 2010. "Stock Market Declines and Liquidity," Journal of Finance, American Finance Association, vol. 65(1), pages 257-293, February.
    26. Vayanos, Dimitri, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
    27. Dang, Tung Lam & Moshirian, Fariborz & Wee, Claudia Koon Ghee & Zhang, Bohui, 2015. "Cross-listings and liquidity commonality around the world," Journal of Financial Markets, Elsevier, vol. 22(C), pages 1-26.
    28. Karolyi, G. Andrew & Lee, Kuan-Hui & van Dijk, Mathijs A., 2012. "Understanding commonality in liquidity around the world," Journal of Financial Economics, Elsevier, vol. 105(1), pages 82-112.
    29. Jennifer Huang & Jiang Wang, 2009. "Liquidity and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2407-2443, July.
    30. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
    31. Lilian Ng & Fei Wu & Jing Yu & Bohui Zhang, 2016. "Foreign Investor Heterogeneity and Stock Liquidity around the World," Review of Finance, European Finance Association, vol. 20(5), pages 1867-1910.
    32. Aggarwal, Reena & Erel, Isil & Ferreira, Miguel & Matos, Pedro, 2011. "Does governance travel around the world? Evidence from institutional investors," Journal of Financial Economics, Elsevier, vol. 100(1), pages 154-181, April.
    33. Aragon, George O. & Strahan, Philip E., 2012. "Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy," Journal of Financial Economics, Elsevier, vol. 103(3), pages 570-587.
    34. Wagner, Wolf, 2010. "Diversification at financial institutions and systemic crises," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 373-386, July.
    35. Calomiris, Charles W. & Love, Inessa & Martínez Pería, María Soledad, 2012. "Stock returns’ sensitivities to crisis shocks: Evidence from developed and emerging markets," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 743-765.
    36. Lee, Kuan-Hui, 2011. "The world price of liquidity risk," Journal of Financial Economics, Elsevier, vol. 99(1), pages 136-161, January.
    37. Anand, Amber & Irvine, Paul & Puckett, Andy & Venkataraman, Kumar, 2013. "Institutional trading and stock resiliency: Evidence from the 2007–2009 financial crisis," Journal of Financial Economics, Elsevier, vol. 108(3), pages 773-797.
    38. Xiong, Wei, 2001. "Convergence trading with wealth effects: an amplification mechanism in financial markets," Journal of Financial Economics, Elsevier, vol. 62(2), pages 247-292, November.
    39. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    40. Myron S. Scholes, 2000. "Crisis and Risk Management," American Economic Review, American Economic Association, vol. 90(2), pages 17-21, May.
    41. Nicole M. Boyson & Christof W. Stahel & René M. Stulz, 2010. "Hedge Fund Contagion and Liquidity Shocks," Journal of Finance, American Finance Association, vol. 65(5), pages 1789-1816, October.
    42. David B. Brown & Bruce Ian Carlin & Miguel Sousa Lobo, 2010. "Optimal Portfolio Liquidation with Distress Risk," Management Science, INFORMS, vol. 56(11), pages 1997-2014, November.
    43. Ferreira, Miguel A. & Matos, Pedro, 2008. "The colors of investors' money: The role of institutional investors around the world," Journal of Financial Economics, Elsevier, vol. 88(3), pages 499-533, June.
    44. Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Liquidity and Risk Management," American Economic Review, American Economic Association, vol. 97(2), pages 193-197, May.
    45. Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, vol. 82(3), pages 631-671, December.
    46. Ozgur S. Ince & R. Burt Porter, 2006. "Individual Equity Return Data From Thomson Datastream: Handle With Care!," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(4), pages 463-479, December.
    47. Cheng, Si & Hameed, Allaudeen & Subrahmanyam, Avanidhar & Titman, Sheridan, 2017. "Short-Term Reversals: The Effects of Past Returns and Institutional Exits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 143-173, February.
    48. Lang, Mark & Maffett, Mark, 2011. "Transparency and liquidity uncertainty in crisis periods," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 101-125.
    49. Tarun Chordia, 2005. "An Empirical Analysis of Stock and Bond Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 85-129.
    50. Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi, 2012. "Hedge Fund Stock Trading in the Financial Crisis of 2007--2009," Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 1-54.
    51. Albert S. Kyle & Wei Xiong, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Camilleri, Silvio John & Galea, Francelle, 2019. "The Determinants of Securities Trading Activity: Evidence from four European Equity Markets," MPRA Paper 95298, University Library of Munich, Germany.
    2. Priyanka Naik & Y. V. Reddy, 2021. "Stock Market Liquidity: A Literature Review," SAGE Open, , vol. 11(1), pages 21582440209, January.
    3. Chen, Fuzhong & Hsu, Chien-Lung & Lin, Arthur J. & Li, Haifeng, 2020. "Holding risky financial assets and subjective wellbeing: Empirical evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    4. Dimcea Andrei, 2023. "The Impact of Social Norms on Stock Liquidity," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 68(1), pages 78-99, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karolyi, G. Andrew & Lee, Kuan-Hui & van Dijk, Mathijs A., 2012. "Understanding commonality in liquidity around the world," Journal of Financial Economics, Elsevier, vol. 105(1), pages 82-112.
    2. Saad, Mohsen & Samet, Anis, 2020. "Collectivism and commonality in liquidity," Journal of Business Research, Elsevier, vol. 116(C), pages 137-162.
    3. Rösch, Christoph G. & Kaserer, Christoph, 2013. "Market liquidity in the financial crisis: The role of liquidity commonality and flight-to-quality," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2284-2302.
    4. Rösch, Christoph G. & Kaserer, Christoph, 2014. "Reprint of: Market liquidity in the financial crisis: The role of liquidity commonality and flight-to-quality," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 152-170.
    5. Lee, Kuan-Hui & Sapriza, Horacio & Wu, Yangru, 2016. "Sovereign debt ratings and stock liquidity around the World," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 99-112.
    6. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    7. Anagnostidis, Panagiotis & Fontaine, Patrice, 2020. "Liquidity commonality and high frequency trading: Evidence from the French stock market," International Review of Financial Analysis, Elsevier, vol. 69(C).
    8. Belkhir, Mohamed & Saad, Mohsen & Samet, Anis, 2020. "Stock extreme illiquidity and the cost of capital," Journal of Banking & Finance, Elsevier, vol. 112(C).
    9. Anand, Amber & Irvine, Paul & Puckett, Andy & Venkataraman, Kumar, 2013. "Institutional trading and stock resiliency: Evidence from the 2007–2009 financial crisis," Journal of Financial Economics, Elsevier, vol. 108(3), pages 773-797.
    10. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
    11. Ma, Rui & Anderson, Hamish D. & Marshall, Ben R., 2019. "Risk perceptions and international stock market liquidity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 94-116.
    12. Nina Karnaukh & Angelo Ranaldo & Paul Söderlind, 2015. "Understanding FX Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 28(11), pages 3073-3108.
    13. Dang, Tung Lam & Nguyen, Thi Minh Hue, 2020. "Liquidity risk and stock performance during the financial crisis," Research in International Business and Finance, Elsevier, vol. 52(C).
    14. Agarwal, Vikas & Aragon, George O. & Shi, Zhen, 2015. "Funding liquidity risk of funds of hedge funds: Evidence from their holdings," CFR Working Papers 15-12, University of Cologne, Centre for Financial Research (CFR).
    15. Vo, Thi Thuy Anh & Dang, Tung Lam & Dang, Man & Hoang, Viet Anh, 2021. "Institutional ownership and commonality in liquidity," Research in International Business and Finance, Elsevier, vol. 57(C).
    16. Chiu, Junmao & Lien, Donald & Tsai, Wei-Che, 2023. "Global financial crisis, funding constraints, and liquidity of VIX futures," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    17. Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
    18. Ben-Rephael, Azi, 2017. "Flight-to-liquidity, market uncertainty, and the actions of mutual fund investors," Journal of Financial Intermediation, Elsevier, vol. 31(C), pages 30-44.
    19. Saad, Mohsen & Samet, Anis, 2017. "Liquidity and the implied cost of equity capital," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 15-38.
    20. Karolyi, G. Andrew & Lee, Kuan Hui & van Dijk, Mathijs A., 2007. "Common Patterns in Commonality in Returns, Liquidity, and Turnover around the World," Working Paper Series 2007-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

    More about this item

    Keywords

    Institutional investor; Liquidity shocks; Financial crisis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:184-209. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.