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

35 Pages Posted: 6 Jan 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: December 6, 2011

Abstract

During the financial crisis in 2007-8, the quoted spread for the average S&P 1500 firm increased by 50%, while the systematic liquidity risk increased by 34%. We find that the trading of a firm's equity by institutional investors increased the firms' quoted spreads, and led to a higher liquidity commonality during the crisis. Institutional sell-side herding contributed strongly to both effects. Our results are robust to different specifications and consistent with theoretical and anecdotal evidence regarding the role of herding 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 (December 6, 2011). Manchester Business School Research Paper No. 623, Available at SSRN: https://ssrn.com/abstract=1980649 or http://dx.doi.org/10.2139/ssrn.1980649

Ser-Huang Poon (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
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Manchester, Manchester M15 6PB
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+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
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Georg Michael Rockinger

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

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Lausanne, 1015
Switzerland
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+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

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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