Market liquidity and institutional trading during the 2007–8 financial crisis |
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| Institution: | 1. Manchester Business School, UK;2. HEC Lausanne and SFI, Switzerland;1. School of Economics, Jinan University, Guangzhou, Guangdong 510632, China;2. The Global Centre for Banking and Financial Innovation, Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom of Great Britain and Northern Ireland;3. Othman Yeop Abdullah Graduate School of Business (OYAGSB), University Utara Malaysia, UUM Sintok, Kedah, Malaysia;4. School of Law, Social and Behavioural Sciences, Kingston University, Penryhn Road, Kingston upon Thames, Surrey KT1 2EE, United Kingdom of Great Britain and Northern Ireland;1. Department of Finance, Ming Chuan University, Taipei, Taiwan, ROC;2. Department of Banking and Finance, TamKang University, Tamsui, New Taipei City, Taiwan |
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| Abstract: | This paper shows that institutional sell-side herding increased bid–ask spreads and liquidity risk during the 2007–8 financial crisis. Such an impact on liquidity is most pronounced in firms with large numbers of institutions that sold the same stocks, that is, have correlated trades. For the same reason, we find institutional investors with a dedicated, buy-and-hold, investment style to be the least likely to herd; their trading activity did not affect stock market liquidity during the crisis. Our results are robust to alternative explanations, different test specifications and consistent with recent theories highlighting the negative impact of institutional trading activity on market liquidity during a crisis. |
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