Institutional Trading and Stock Resiliency: Evidence from the 2007-2009 Financial Crisis

59 Pages Posted: 18 Dec 2009 Last revised: 3 Jul 2013

Amber Anand

Syracuse University - Whitman School of Management

Andy Puckett

University of Tennessee, Knoxville

Paul J. Irvine

Neeley School of Business

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: August 15, 2012

Abstract

We examine the impact of institutional trading on stock resiliency during the financial crisis of 2007-2009. We show that buy-side institutions have different exposure to liquidity factors based on their trading style. Liquidity supplying institutions absorb the long-term order imbalances in the market and are critical to recovery patterns after a liquidity shock. We show that these liquidity suppliers withdraw from risky securities during the crisis and their participation does not recover for an extended period of time. The illiquidity of specific stocks is significantly affected by institutional trading patterns; participation by liquidity supplying institutions can ameliorate illiquidity, while participation by liquidity demanding institutions can exacerbate illiquidity. Our results provide guidance on why some stocks take longer to recover in a crisis.

Keywords: Financial crisis, liquidity, trading cost, institutional trading, funding liquidity

JEL Classification: D82, G14, G23

Suggested Citation

Anand, Amber and Puckett, Andy and Irvine, Paul J. and Venkataraman, Kumar, Institutional Trading and Stock Resiliency: Evidence from the 2007-2009 Financial Crisis (August 15, 2012). Journal of Financial Economics (JFE), Vol. 108, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=1524845 or http://dx.doi.org/10.2139/ssrn.1524845

Amber Anand

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244
United States

Andy Puckett

University of Tennessee, Knoxville ( email )

437 Stokely Managment Center
Knoxville, TN 37996
United States

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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