“Liquidity shocks and institutional trading”
(with Lin Peng and Xi Dong)
This paper analyzes how institutional investors react to stock-level liquidity shocks. We perform portfolio analysis as well as cross-sectional, stock-level regressions and find a significant relationship between a stock’s liquidity shocks and subsequent institutional trading. Institutional investors, in particular transient institutions, increase their stock ownership in stocks that experience positive liquidity shocks. Decile portfolios representing difference between stocks with positive and negative liquidity shocks are related to future increase in transient institutions’ ownership by 0.37%, which represents 11% of transient investors’ trading standard deviation. There is also a positive relationship between liquidity shocks and the change in the number of institutional holders. The results are stronger in times of economic prosperity, in small stocks during the periods of increased market liquidity. We also find evidence that reaction to stock-level liquidity shocks does not arise from their correlation with market liquidity changes. We argue that this institutional trading pattern is consistent with institutional investors taking advantage of mispricing generated by the market’s underreaction to liquidity shocks. We further explore profitability of such trading strategy and feedback effects from institutional trading to liquidity shocks. Using the panel VAR framework we find that institutional trading amplifies future liquidity shocks.
“Dispersion in institutional investors opinions and stock returns”
This paper provides evidence that differences of opinion of institutional investors have an important and significant impact on stock prices in accordance with Miller (1977) price optimism model. The strategy going long in low dispersion and short in high dispersion portfolio earns a significant annual return of 2%-4.5% and is robust after including a number of control variables. The dispersion measures based on analyst opinion and institutional trading seem to be complementary to each other and result in a different grouping of stocks. There is additional evidence that stocks bought by institutions (when they agree) perform better than those sold.
- SSHRC Small Research Grant, UOIT
Social Sciences and Humanities Research Council (SSHRC) Institutional Grant program (with Amir Akbari), $7,000 for the project “Government Real Estate market interventions and their impact on the Canadian equity market”.
- “Dispersion in institutional investors opinions and stock returns”
Baruch College PhD Seminars, 2013
- “Liquidity shocks and institutional trading”
- Baruch College PhD Seminars, 2014
- Baruch College Economics and Finance Department Seminars, 2015
- FMA European Doctoral Student Consortium, Venice, Italy, 2015
- FMA Annual Meeting, Orlando, FL, 2015
- Southern Finance Association Annual Meeting, Captiva Island, FL, 2015
- Midwest Finance Association Annual Conference, Atlanta, GA, 2016
- China International Conference in Finance, Xiamen, China, 2016 (by coauthor)