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Institutional Investors and Stock Market Volatility

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Listed author(s):
  • Xavier Gabaix
  • Parameswaran Gopikrishnan
  • Vasiliki Plerou
  • H. Eugene Stanley

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.

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File URL: http://www.nber.org/papers/w11722.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11722.

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Date of creation: Nov 2005
Publication status: published as Gabaix, Xavier, Parameswaran Gopikrishnan, Vasiliki Plerou and H. Eugene Stanley. "Institutional Investors And Stock Market Volatility," Quarterly Journal of Economics, 2006, v121(2,May), 461-504.
Handle: RePEc:nbr:nberwo:11722
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Find related papers by JEL classification:
  • G1 - Financial Economics - - General Financial Markets
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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