On Institutional Trading, Behavioral Bias, and Demand for Liquidity

45 Pages Posted: 4 Aug 2017 Last revised: 23 Mar 2018

See all articles by Sugato Chakravarty

Sugato Chakravarty

Purdue University

Rina Ray

University of Colorado at Denver

Date Written: June 23, 2017


Using a large transaction level dataset, we find that institutional investors can make economically insignificant -4 to 9 basis points net profit on their marked-to-market portfolio of buy – sell transactions over 1-day to 4-week holding period. The negative net marked-to-market profit comes exclusively from trades with 1-day holding period. We find no evidence of overconfidence, biased self-attribution, or disposition effect among institutional investors. Pension fund managers outperform money managers. Institutions engage in short-term trades despite earning net zero return for liquidity, tax-minimization, risk-management, and window-dressing reasons. Among these non-profit maximizing rational motives for trading, liquidity trading motive is the strongest.

Keywords: behavioral bias, institutional investors, liquidity, skill, transaction cost

JEL Classification: G02, G11, G23

Suggested Citation

Chakravarty, Sugato and Ray, Rina, On Institutional Trading, Behavioral Bias, and Demand for Liquidity (June 23, 2017). 2018 Academic Research Colloquium for Financial Planning and Related Disciplines. Available at SSRN: https://ssrn.com/abstract=3013436 or http://dx.doi.org/10.2139/ssrn.3013436

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Rina Ray (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States
303-315-8455 (Phone)

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