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Institutional Investors and Stock Market Volatility

51 Pages Posted: 11 Sep 2003 Last revised: 1 Jun 2010

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); New York University - Stern School of Business

Parameswaran Gopikrishnan

Boston University - Center for Polymer Studies

Vasiliki Plerou

Boston University - Center for Polymer Studies

H. Eugene Stanley

Boston University - Center for Polymer Studies

Multiple version iconThere are 2 versions of this paper

Date Written: October 2, 2005

Abstract

We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets. Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals. We derive the optimal trading behavior of thse investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.

Keywords: stock market crashes, power law, tail behavior, Levy distribution, market microstructure, behavioral finance, scaling, volume, excess volatility, price pressure

JEL Classification: G10, E44

Suggested Citation

Gabaix, Xavier and Gopikrishnan, Parameswaran and Plerou, Vasiliki and Stanley, H. Eugene, Institutional Investors and Stock Market Volatility (October 2, 2005). MIT Department of Economics Working Paper No. 03-30. Available at SSRN: https://ssrn.com/abstract=442940 or http://dx.doi.org/10.2139/ssrn.442940

Xavier Gabaix (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Parameswaran Gopikrishnan

Boston University - Center for Polymer Studies ( email )

590 Commonwealth Ave.
Boston, MA 02215
United States
617-975-0342 (Phone)
617-353-9393 (Fax)

Vasiliki Plerou

Boston University - Center for Polymer Studies ( email )

590 Commonwealth Ave.
Boston, MA 02215
United States
617-353-8000 (Phone)

H. Eugene Stanley

Boston University - Center for Polymer Studies ( email )

Boston, MA 02215
United States

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