Liquidity Shocks and Institutional Trading

75 Pages Posted: 29 Apr 2022

See all articles by Xi Dong

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Karolina Krystyniak

Ontario Tech University

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: April 20, 2022

Abstract

Stock-level liquidity shocks not only affect the transaction costs institutional investors face but also generate mispricing opportunities. We find that institutions increase (decrease) their trading intensity when liquidity improves (declines). Further, active institutions trade to take advantage of liquidity-driven mispricing, realizing significant returns, and shortening the duration of the mispricing. The relation between liquidity and institutional trading is stronger in high-liquidity states and is mostly associated with idiosyncratic shocks. Our evidence supports the predictions of strategic trading models with time-varying liquidity and provides insights into the tradeoffs institutions face and the feedback effects of their trading on liquidity and prices.

Keywords: Liquidity, Institutional Investors, Transaction Cost, Informed Trading, Mispricing, Market Efficiency, Feedback Effects

JEL Classification: G12, G14, G23

Suggested Citation

Dong, Xi and Krystyniak, Karolina and Peng, Lin, Liquidity Shocks and Institutional Trading (April 20, 2022). Available at SSRN: https://ssrn.com/abstract=4088453 or http://dx.doi.org/10.2139/ssrn.4088453

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States

HOME PAGE: http://xidongbaruch.weebly.com/

Karolina Krystyniak

Ontario Tech University ( email )

2000 Simcoe Street North
Oshawa, Ontario L1H 7K4
Canada

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
213
Abstract Views
886
Rank
261,543
PlumX Metrics