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Cited by 330Financial Markets and Investment StrategiesCorporate Finance and GovernanceFinancial Risk and Volatility Modeling

Investors' Horizons and the Amplification of Market Shocks

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Cella, Cristina, Ellul, Andrew, Giannetti, Mariassunta·2013·Review of Financial Studies
DOI 10.1093/rfs/hht023
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Abstract

During episodes of market turmoil, institutional investors with short trading horizons are inclined or forced to sell their holdings to a larger extent than investors with longer trading horizons. This may amplify the effects of market-wide shocks on the prices of stocks held by short horizon investors. We test the relevance of this mechanism by exploiting the negative shock caused by Lehman Brothers’ bankruptcy in September 2008. Consistent with our conjecture, short-term investors sell significantly more than long-term investors around and after the Lehman Brothers’ bankruptcy. Most importantly, stocks held by short-term investors experience more severe price drops and larger price reversals than those held by long-term investors. Since they are obtained after controlling for contemporaneous net flows, the stocks’ exposure to innovations in implied volatility and aggregate liquidity, various firms’ and investors’ characteristics, including the momentum effect and the propensity of institutional investors to follow an index, our results cannot be explained by characteristics of the institutions’ investment strategy other than their investment horizons. We also show that the effect of investor trading horizon emerges during other episodes of severe market turmoil, such as the October 1987 market crash. Overall, the empirical evidence strongly indicates that investors’ short horizons amplify the effects of market-wide negative shocks.

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Authors
Cella, C., Ellul, A., & Giannetti, M.
Affiliations
  • Stockholm School of Economics (SE)
  • Indiana University (US)
ORCID
Venue
Review of Financial Studies
Publisher
Oxford University Press (OUP)
Published
2013-05-15
Volume
26
Issue
7
Pages
1607-1648
ISSN
  • 0893-9454 (ISSN-L)
  • 1465-7368
DOI
10.1093/rfs/hht023
OpenAlex
W3125801986
Cited by
330
References
4
Citations by year
2026: 22 · 2025: 33 · 2024: 20 · 2023: 36 · 2022: 18 · 2021: 30 · 2020: 32 · 2019: 27 · 2018: 23 · 2017: 20 · 2016: 16 · 2015: 19 · 2014: 11 · 2013: 12 · 2012: 4
FWCI
33.80
Type
journal article
Language
en
Open access
Licence
cc-by
Locations
  • Review of Financial Studies (publishedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
Funders
  • Università degli Studi di Napoli Federico II
  • Riksbankens Jubileumsfond
  • Kelley School of Business, Indiana University
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
  • Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Risk and Volatility Modeling
Keywords
institutional investors, market shocks, price pressure, stock price decline, price reversal, liquidity demand, market turmoil, short selling

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