Market Liquidity and Institutional Trading During the 2007-8 Financial Crisis

37 Pages Posted: 20 Jun 2011 Last revised: 22 Aug 2012

See all articles by Ser-Huang Poon

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 2012

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.

Keywords: Institutional Herding, Institutional Count, Institutional Holdings, Market Liquidity, Financial Crises

JEL Classification: G01, G14, G20

Suggested Citation

Poon, Ser-Huang and Rockinger, Georg Michael and Stathopoulos, Konstantinos, Market Liquidity and Institutional Trading During the 2007-8 Financial Crisis (August 2012). Available at SSRN: https://ssrn.com/abstract=1868366 or http://dx.doi.org/10.2139/ssrn.1868366

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
London, NW12DB
United Kingdom

Georg Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 728 3348 (Phone)
+41+21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/mrockinger

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Konstantinos Stathopoulos (Contact Author)

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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