Investor Heterogeneity and Liquidity
64 Pages Posted: 10 Feb 2017 Last revised: 4 May 2020
Date Written: May 3, 2020
We find that stocks held by institutions with similar investment horizon are less liquid, have higher volatility of liquidity and command a higher illiquidity premium. We find that fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. Additionally, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have less heterogeneous investor base. We also find that the illiquidity premium is concentrated in stocks with low investor heterogeneity. Our findings are economically stronger in the post-2000 period with the growth in the diversity of institutional investor base.
Keywords: Liquidity, Volatility of Liquidity, Investor Heterogeneity, Illiquidity Premium
JEL Classification: G12, G23
Suggested Citation: Suggested Citation