Crowded Trades, Market Clustering, and Price Instability

Tinbergen Institute Discussion Paper 2020-007/II

50 Pages Posted: 10 Mar 2020

See all articles by Marc van Kralingen

Marc van Kralingen

Aegon N.V

Diego Garlaschelli

Leiden University

Karolina Scholtus

Erasmus University Rotterdam (EUR)

Iman van Lelyveld

De Nederlandsche Bank; Vrije Universiteit Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2020

Abstract

Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability.

Keywords: crowded trading, tail-risk, financial stability

JEL Classification: G02, G14, G20

Suggested Citation

van Kralingen, Marc and Garlaschelli, Diego and Navickaite, Karolina and van Lelyveld, Iman, Crowded Trades, Market Clustering, and Price Instability (January 30, 2020). Tinbergen Institute Discussion Paper 2020-007/II, Available at SSRN: https://ssrn.com/abstract=3531644 or http://dx.doi.org/10.2139/ssrn.3531644

Marc Van Kralingen (Contact Author)

Aegon N.V ( email )

Netherlands

Diego Garlaschelli

Leiden University ( email )

Postbus 9500
Leiden, Zuid Holland 2300 RA
Netherlands

Karolina Navickaite

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Iman van Lelyveld

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam ( email )

Netherlands

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