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http://ssrn.com/abstract=1678021
 
 

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Investors’ Horizons and the Amplification of Market Shocks


Cristina Cella


Stockholm School of Economics; Swedish House of Finance; Centre for Studies in Economics and Finance (CSEF)

Andrew Ellul


Indiana University - Kelley School of Business - Department of Finance

Mariassunta Giannetti


Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

May 2011

ECGI - Finance Working Paper No. 298/2010

Abstract:     
During episodes of market turmoil, institutional investors with short trading horizons are inclined or forced to sell their holdings to a larger extent than investors with longer trading horizons. This may amplify the effects of market-wide shocks on the prices of stocks held by short horizon investors. We test the relevance of this mechanism by exploiting the negative shock caused by Lehman Brothers’ bankruptcy in September 2008. Consistent with our conjecture, short-term investors sell significantly more than long-term investors around and after the Lehman Brothers’ bankruptcy. Most importantly, stocks held by short-term investors experience more severe price drops and larger price reversals than those held by long-term investors. Since they are obtained after controlling for contemporaneous net flows, the stocks’ exposure to innovations in implied volatility and aggregate liquidity, various firms’ and investors’ characteristics, including the momentum effect and the propensity of institutional investors to follow an index, our results cannot be explained by characteristics of the institutions’ investment strategy other than their investment horizons. We also show that the effect of investor trading horizon emerges during other episodes of severe market turmoil, such as the October 1987 market crash. Overall, the empirical evidence strongly indicates that investors’ short horizons amplify the effects of market-wide negative shocks.

Number of Pages in PDF File: 60

Keywords: Fire sales, Institutional investors, Investor horizon, Market crashes, Financial crisis

JEL Classification: G11, G12, G14, G18, G22

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Date posted: September 18, 2010 ; Last revised: June 4, 2012

Suggested Citation

Cella, Cristina and Ellul, Andrew and Giannetti, Mariassunta, Investors’ Horizons and the Amplification of Market Shocks (May 2011). ECGI - Finance Working Paper No. 298/2010. Available at SSRN: http://ssrn.com/abstract=1678021 or http://dx.doi.org/10.2139/ssrn.1678021

Contact Information

Cristina Cella
Stockholm School of Economics ( email ) ( email )
Drottninggatan 98
111 60 Stockholm
Sweden
Swedish House of Finance ( email ) ( email )
Drottninggatan 98
111 60 Stockholm
Sweden
Centre for Studies in Economics and Finance (CSEF) ( email )
84084 Fisciano, Salerno
Italy
Andrew Ellul
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Mariassunta Giannetti (Contact Author)
Stockholm School of Economics ( email )
P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)
HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm
Sweden

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