Similar Investors

Abstract

We test the prediction that investors divest from an asset in anticipation of large liquidation costs when their portfolio similarity with other asset holders is high. We provide evidence supporting this hypothesis using detailed data on money market funds that invest in the debt securities of financial institutions. We develop an instrument that exploits variation in portfolio similarity driven by idiosyncratic redemptions from other funds to confirm our results. Consistent with our hypothesis, the effect of portfolio similarity on divestment is stronger for ex-post illiquid securities, for more illiquid and diversified funds, and for actively managed institutional funds.

Keywords: institutional investors, liquidity risk, portfolio similarity, wholesale funding

JEL Classification: G1, G21