Institutional Investors and Stock Market Volatility

52 Pages Posted: 18 Jan 2006 Last revised: 14 Jul 2010

See all articles by Xavier Gabaix

Xavier Gabaix

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

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: November 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 these investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.

Suggested Citation

Gabaix, Xavier and Gopikrishnan, Parameswaran and Plerou, Vasiliki and Stanley, H. Eugene, Institutional Investors and Stock Market Volatility (November 2005). NBER Working Paper No. w11722. Available at SSRN: https://ssrn.com/abstract=837165

Xavier Gabaix (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
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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