Working Paper: NBER ID: w11722
Authors: Xavier Gabaix; Parameswaran Gopikrishnan; Vasiliki Plerou; H. Eugene Stanley
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.
Keywords: institutional investors; stock market volatility; trading behavior; power laws
JEL Codes: G1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Large institutional trades (G14) | Stock market volatility (G17) |
| Large institutional trades (G14) | Price changes (P22) |
| Large institutional trades (G14) | Trading volume (G15) |
| Market liquidity (G19) | Stock market volatility (G17) |
| External news events (G14) | Stock market volatility (G17) |