Liquidity Risk and Institutional Ownership

54 Pages Posted: 17 Nov 2011 Last revised: 20 Oct 2015

See all articles by Charles Cao

Charles Cao

Pennsylvania State University

Lubomir Petrasek

Federal Reserve Board

Date Written: May 5, 2014


Institutional ownership affects the sensitivity of stock returns to changes in market liquidity (liquidity risk). Overall, institutional ownership lowers the liquidity risk of stocks. However, different types of institutions affect liquidity risk in opposite ways. Stocks held by hedge funds, especially levered hedge funds, as marginal investors are more sensitive to changes in market liquidity than comparable stocks held by other types of institutions or by individuals. In contrast, stocks held by banks are less sensitive to changes in aggregate liquidity. These findings are robust to alternative specifications that control for institutional preferences for different stock characteristics and risk.

Keywords: Liquidity risk, institutional investors, hedge funds

JEL Classification: G14, G23

Suggested Citation

Cao, Charles and Petrasek, Lubomir, Liquidity Risk and Institutional Ownership (May 5, 2014). Journal of Financial Markets, Forthcoming; FEDS Working Paper No. 2011-49. Available at SSRN: or

Charles Cao

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)


Lubomir Petrasek (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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