Institutional Investment and Commonality in Liquidity: Evidence from Transaction Data
41 Pages Posted: 22 Dec 2013 Last revised: 30 Sep 2015
Date Written: September 29, 2015
This paper investigates the direct link between institutional investors' trading activity and comovement in stock liquidity using data on actual institutional investors' trades. We find strong empirical evidence that stocks that are highly traded by institutions exhibit commonality in liquidity. This result appears to be the consequence of correlated trading, as pairs of stocks connected through common institutional trading covary more together. Using the mutual fund scandal of 2003, we nd some evidence of a causal link between institutional investors' trades and stock liquidity covariation.
Keywords: Liquidity; Commonality in liquidity; Institutional investors
JEL Classification: G10; G23
Suggested Citation: Suggested Citation