Informed Trading and Co-Illiquidity

61 Pages Posted: 19 Apr 2021

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Aleksandra Rzeźnik

York University, Schulich School of Business

Soeren Hvidkjaer

Copenhagen Business School

Date Written: April 14, 2021


We study the link between informed trading and co-movement in illiquidity. We argue that investors concerned with liquidity and fire-sale shocks respond to an increase in informed trading by shifting their portfolios away from stocks with high information asymmetry. This rebalancing causes a substitution in ownership away from the investors who induce financial fragility and co-movement in illiquidity, reducing the co-illiquidity of affected stocks. We exploit two experiments – the SHO experiment and the short selling bans – that impact the incentives/ability of informed traders to trade. The results suggest that informed traders ameliorate co-movement in illiquidity, a major problem that emerged during the global financial crisis.

Keywords: Short-sales constraints, liquidity, commonality, informed trading

JEL Classification: G12, G14, G15

Suggested Citation

Massa, Massimo and Rzeźnik, Aleksandra and Hvidkjaer, Soeren, Informed Trading and Co-Illiquidity (April 14, 2021). Available at SSRN: or

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
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+33 1 6072 4045 (Fax)

Aleksandra Rzeźnik (Contact Author)

York University, Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3

Soeren Hvidkjaer

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000


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