Investor Heterogeneity and Liquidity

Kalok Chan; Si Cheng; Allaudeen Hameed

doi:10.1017/S0022109022000217

Investor Heterogeneity and Liquidity

Kalok Chan^*, Si Cheng, Allaudeen Hameed

^*Corresponding author for this work

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

8 Citations (Scopus)

Abstract

Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity. © The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington.

Original language	English
Pages (from-to)	2798-2833
Journal	Journal of Financial and Quantitative Analysis
Volume	57
Issue number	7
Online published	3 Jun 2022
DOIs	https://doi.org/10.1017/S0022109022000217
Publication status	Published - Nov 2022
Externally published	Yes

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title = "Investor Heterogeneity and Liquidity",

abstract = "Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity. {\textcopyright} The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington.",

author = "Kalok Chan and Si Cheng and Allaudeen Hameed",

year = "2022",

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doi = "10.1017/S0022109022000217",

language = "English",

volume = "57",

pages = "2798--2833",

journal = "Journal of Financial and Quantitative Analysis",

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TY - JOUR

T1 - Investor Heterogeneity and Liquidity

AU - Chan, Kalok

AU - Cheng, Si

AU - Hameed, Allaudeen

PY - 2022/11

Y1 - 2022/11

N2 - Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity. © The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington.

AB - Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity. © The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington.

UR - http://www.scopus.com/inward/record.url?scp=85132806785&partnerID=8YFLogxK

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U2 - 10.1017/S0022109022000217

DO - 10.1017/S0022109022000217

M3 - RGC 21 - Publication in refereed journal

SN - 0022-1090

VL - 57

SP - 2798

EP - 2833

JO - Journal of Financial and Quantitative Analysis

JF - Journal of Financial and Quantitative Analysis

IS - 7

ER -

Investor Heterogeneity and Liquidity

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