Institutional Clientele and Comovement
47 Pages Posted: 24 Jan 2009 Last revised: 16 May 2015
Date Written: May 15, 2015
Previous literature has found that stock returns comove more than fundamentals. In this paper, I document the role of institutional clienteles in generating the comovement. To define clienteles, I apply clustering algorithms to institutional holdings. I find that the majority of institutional investors can be stably clustered into a small number of clienteles. Funds within the same clientele tend to suffer correlated liquidity shocks, generating correlated order flows to the underlying stocks. As a result, stocks held by the same clientele comove excessively in trading volume and return.
Keywords: institutional holdings, stock comovement, cluster
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