Investor Heterogeneity and Liquidity
51 Pages Posted: 10 Feb 2017 Last revised: 11 Sep 2019
Date Written: September 3, 2019
We find that stocks held by institutions with similar investment horizon are less liquid and have higher volatility of liquidity. Consistent with correlated demand for liquidity, fund flows are highly correlated among funds with similar investment horizon but not when funds differ in their investment horizons. Also, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have less heterogeneous investor base. Additionally, we find that the premium associated with illiquid stocks is concentrated in stocks with low investor heterogeneity. Our findings are stronger in the recent decades, emphasizing the effect of increased institutional investor participation.
Keywords: Liquidity, Volatility of Liquidity, Investor Heterogeneity, Liquidity Premium
JEL Classification: G12, G23
Suggested Citation: Suggested Citation