Institutional Trading and Stock Resiliency: Evidence from the 2007-2009 Financial Crisis
59 Pages Posted: 18 Dec 2009 Last revised: 3 Jul 2013
Date Written: August 15, 2012
Abstract
We examine the impact of institutional trading on stock resiliency during the financial crisis of 2007-2009. We show that buy-side institutions have different exposure to liquidity factors based on their trading style. Liquidity supplying institutions absorb the long-term order imbalances in the market and are critical to recovery patterns after a liquidity shock. We show that these liquidity suppliers withdraw from risky securities during the crisis and their participation does not recover for an extended period of time. The illiquidity of specific stocks is significantly affected by institutional trading patterns; participation by liquidity supplying institutions can ameliorate illiquidity, while participation by liquidity demanding institutions can exacerbate illiquidity. Our results provide guidance on why some stocks take longer to recover in a crisis.
Keywords: Financial crisis, liquidity, trading cost, institutional trading, funding liquidity
JEL Classification: D82, G14, G23
Suggested Citation: Suggested Citation
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