On Institutional Trading, Behavioral Bias, and Demand for Liquidity
45 Pages Posted: 4 Aug 2017 Last revised: 23 Mar 2018
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: Suggested Citation