Abstract

http://ssrn.com/abstract=442940
 
 

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Institutional Investors and Stock Market Volatility


Xavier Gabaix


New York University - Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Parameswaran Gopikrishnan


Boston University - Center for Polymer Studies

Vasiliki Plerou


Boston University - Center for Polymer Studies

H. Eugene Stanley


Boston 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 Series


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Date posted: September 11, 2003 ; Last revised: June 1, 2010

Suggested Citation

Gabaix, Xavier and Gopikrishnan, Parameswaran and Plerou, Vasiliki and Stanley, H. Eugene, Institutional Investors and Stock Market Volatility (October 2, 2005). MIT Department of Economics Working Paper No. 03-30. Available at SSRN: http://ssrn.com/abstract=442940 or http://dx.doi.org/10.2139/ssrn.442940

Contact Information

Xavier Gabaix (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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
Parameswaran Gopikrishnan
Boston University - Center for Polymer Studies ( email )
590 Commonwealth Ave.
Boston, MA 02215
United States
617-975-0342 (Phone)
617-353-9393 (Fax)
Vasiliki Plerou
Boston University - Center for Polymer Studies ( email )
590 Commonwealth Ave.
Boston, MA 02215
United States
617-353-8000 (Phone)
H. Eugene Stanley
Boston University - Center for Polymer Studies ( email )
Boston, MA 02215
United States
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