Investor Heterogeneity and Liquidity

Journal of Financial and Quantitative Analysis, Vol. 57, No. 7, 2022

65 Pages Posted: 10 Feb 2017 Last revised: 28 Oct 2022

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Si Cheng

Syracuse University - Department of Finance

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Date Written: February 11, 2021

Abstract

Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. Additionally, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity.

Keywords: Liquidity, Volatility of Liquidity, Investor Heterogeneity, Illiquidity Premium

JEL Classification: G12, G23

Suggested Citation

Chan, Kalok and Cheng, Si and Hameed, Allaudeen, Investor Heterogeneity and Liquidity (February 11, 2021). Journal of Financial and Quantitative Analysis, Vol. 57, No. 7, 2022, Available at SSRN: https://ssrn.com/abstract=2914324 or http://dx.doi.org/10.2139/ssrn.2914324

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Si Cheng (Contact Author)

Syracuse University - Department of Finance ( email )

Whitman School of Management
721 University Avenue
Syracuse, NY 13244
United States

HOME PAGE: http://si-cheng.net/

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=1

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