Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation

34 Pages Posted: 7 Nov 2008

See all articles by Gideon Saar

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Multiple version iconThere are 4 versions of this paper

Date Written: October 1999

Abstract

Empirical research in finance documented the existence of a permanent price impact asymmetry between buyer and seller-initiated block trades: the permanent price impact of buys is larger than that of sells. This paper develops a theoretical model to explain and investigate the asymmetry phenomenon. The model formalizes an intuition that the dynamic tradingstrategy of profit-maximizing institutional portfolio managers creates a difference between the information content of buys and sells. It is this difference that causes the expected permanent price impact asymmetry. The model produces new empirical implications concerning the relationship between the asymmetry phenomenon and the economic environment. The main implication of the model is that the history of price performance in uences the asymmetry.The longer the run-up in a stock's price, the less is the asymmetry. The greater thetrading intensity of institutional investors or the more "informationally-active" a stock, the more pronounced is the asymmetry when a stock's price has not been going up or is at the beginning of a price run-up. The opposite result appears after a long period of (abnormal) price appreciation.

Suggested Citation

Saar, Gideon, Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation (October 1999). NYU Working Paper No. FIN-99-030, Available at SSRN: https://ssrn.com/abstract=1297112

Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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