The Behavior of Stock Prices Around Institutional Trades
Louis K.C. Chan,Josef Lakonishok +1 more
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In this paper, the authors analyzed the price impact and execution cost of 37 large investment management firms from July 1986 to December 1988 and found that market impact and trading cost are related to firm capitalization, relative package size, and the identity of the management firm behind the trade.Abstract:
All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence ("package") of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact. FINANCIAL ECONOMISTS HAVE LONG studied the equity trading process and its impact on stock prices. Much prior empirical research isolates individual trades and analyzes the behavior of the stock price around each trade. See, for example, Kraus and Stoll (1972a), Holthausen, Leftwich, and Mayers (1987, 1990), Keim and Madhavan (1991), Petersen and Umlauf (1991), Hausman, Lo, and MacKinlay (1992) and Chan and Lakonishok (1993). Evaluating the behavior of stock prices around trades provides a means of discriminating among various hypotheses as to the elasticity of the demand for stocks; yields an estimate of the cost of executing trades and a measure of the liquidity of a market; and permits tests of different models of the determination of quotes and transaction prices. For many institutional investors, however, even a moderately-sized position in a stock may represent a large fraction of the stock's trading volume. Accordingly, an investment manager's order is often broken up into several trades. It is often misleading, therefore, to consider an individual trade as the basic unit of analysis in the study of trading activity and its effects on prices. This paper uses the record of trades executed by 37 large investment manageread more
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TL;DR: In this paper, a wider-angle lens exposes an imposing image of commonality, showing that quoted spreads, quoted depth, andective spreads co-move with market and industry-wide liquidity.
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References
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Efficient Capital Markets: II
TL;DR: A review of the market efficiency literature can be found in this article, where the authors discuss the work that they find most interesting, and offer their views on what we have learned from the research on market efficiency.
Journal ArticleDOI
Inferring Trade Direction from Intraday Data
Charles M.C. Lee,Mark J. Ready +1 more
TL;DR: In this paper, the authors evaluate alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data and identify two serious potential problems with this method, namely, that quotes are often recorded ahead of the trade that triggered them and that trades inside the spread are not readily classifiable.
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