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Institutional Investors and Stock Market VolatilityXavier GabaixNew York University - Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) Parameswaran GopikrishnanBoston University - Center for Polymer Studies Vasiliki PlerouBoston University - Center for Polymer Studies H. Eugene StanleyBoston University - Center for Polymer Studies October 2, 2005 MIT Department of Economics Working Paper No. 03-30 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 thse investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.
Number of Pages in PDF File: 51 Keywords: stock market crashes, power law, tail behavior, Levy distribution, market microstructure, behavioral finance, scaling, volume, excess volatility, price pressure JEL Classification: G10, E44 Accepted Paper SeriesDate posted: September 11, 2003 ; Last revised: June 1, 2010Suggested CitationContact Information
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