Investors' Horizons and the Amplification of Market Shocks
Review of Financial Studies, Forthcoming
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 298/2010
70 Pages Posted: 21 Apr 2012 Last revised: 30 Oct 2018
There are 2 versions of this paper
Investors' Horizons and the Amplification of Market Shocks
Investors' Horizons and the Amplification of Market Shocks
Date Written: February 12, 2013
Abstract
This paper shows that during episodes of market turmoil 13F institutional investors with short trading horizons sell their stockholdings to a larger extent than 13F institutional investors with longer trading horizons. This creates price pressure for stocks mostly held by short horizon investors, which, as a consequence, experience larger price drops, and subsequent reversals, than stocks mostly held by long horizon investors. These findings, obtained after controlling for the withdrawals experienced by the investors, are not driven by other institutional investors’ and firms’ characteristics. Overall, the evidence indicates that investors with short horizons amplify the effects of market-wide negative shocks by demanding liquidity at times when other potential buyers’ capital is scarce.
Keywords: fire sales, institutional investors, investor horizon, market crashes, financial crisis
JEL Classification: G11, G12, G14, G18, G22
Suggested Citation: Suggested Citation
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