Institutional investors and stock market volatility
By: [by] Xavier Gabaix ... [et al.]
Contributors: Gopikrishnan, Parameswaran; Plerou, Vasiliki; Stanley, H. Eugene (Harry Eugene), 1941-; Massachusetts Institute of Technology. Dept. of Economics
Edition: Rev.
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 03-30 [2010 revision]; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 03-30, 2010.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Number of pages: 50
Description: 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 Classifications: G10, E44.
Notes: Statement of responsibility on t.p. reads: Xavier Gabaix, Parameswaran Gopikrishnan, Vasiliki Plerou, H. Eugene Stanley.

"October 2, 2005. Revised: May 12, 2010."

Includes bibliographical references (p. 33-43).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.