Institutional Trading Strategies and Contagion around the Financial Crisis

Purpose – The purpose of this paper is to explore the impact of institutional trading on the market quality during the financial crisis and short sale ban. Design/methodology/approach – The following methods was applied to discuss the total impact on market quality and efficiency of short sale ban in USA from 2001 to 2010. The author examined institutional ownership and breadth of ownership while performing a mean variance tests for changes in efficiency as well as multivariate analysis. Findings – Analyzing USA, Standard and Poor’s 500 stocks the author find increase high-low volatility, realized volatility, effective spread and relative quoted spread during January 1, 2007 to December 31, 2010. Realized volatility increases for both small and large quantile stocks. High-low volatility increases for small quantile stocks and relative quoted spread increases for large quantile stocks. Comparing the percentage change between pre and climax period we find that large quantile stocks have a negative association between breadth of institutional ownership and returns and a positive relation high-low volatility, realized effective spread and quoted spread to returns. Originality/value – The present paper is the first to discuss the total impact on market quality and efficiency of short sale ban in USA from 2001 to 2010. The author find a remarkable improvement in market efficiency (variance ratios) after the crisis period for small and non-financial stocks, while the price efficiency lost during the crisis period is more persistent for large and financial stocks.

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Market liquidity and institutional trading during the 2007–8 financial crisis

International Review of Financial Analysis ◽

10.1016/j.irfa.2013.06.003 ◽

2013 ◽

Vol 30 ◽

pp. 86-97 ◽

Cited By ~ 10

Author(s):

Ser-Huang Poon ◽

Michael Rockinger ◽

Konstantinos Stathopoulos

Keyword(s):

Financial Crisis ◽

Market Liquidity ◽

Institutional Trading

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Leveraged/Inverse ETFs and Volatility in the Korean Market

Journal of Derivatives and Quantitative Studies ◽

10.1108/jdqs-03-2015-b0002 ◽

2015 ◽

Vol 23 (3) ◽

pp. 353-366

Author(s):

Soo-Hyun Kim ◽

Kyuseok Lee ◽

Hyoung-Goo Kang

Keyword(s):

Financial Crisis ◽

Financial Market ◽

Financial Stability ◽

Public Policies ◽

The Body ◽

Trading Strategies ◽

Policy Makers ◽

Financial Innovations ◽

Significant Challenge ◽

Korean Market

There have been the concerns that leveraged and inverse ETFs contribute to the financial crisis of 2007~2008. Several researchers have investigated this important issue. However, there is no consensus yet whether leveraged and inverse ETFs destabilize a financial market. Financial stability is an important subject for policy makers, practitioners and academia. ETFs are one of the most important financial innovations. In particular, leveraged and inverse become more and more influential. Therefore, such lack of academic and practical consensus is a significant challenge. In this paper, we analyze whether leveraged and inverse ETFs affect the price and volatility of Korean market. Thus, our research contributes to the body of literature and to the design of public policies and trading strategies. Our research can also advance the development of ETF industry, one of the fastest growing and promising sector in the Korean financial market.

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Do Institutional Investors Know Banks Better? Evidence From Institutional Trading Surrounding the 2008 Financial Crisis

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x18822347 ◽

2019 ◽

Vol 35 (4) ◽

pp. 777-802

Author(s):

Wei-Ling Song ◽

Hui (Hillary) Wang

Keyword(s):

Financial Crisis ◽

Institutional Investors ◽

Abnormal Returns ◽

Insurance Companies ◽

Economic Damage ◽

Institutional Trading ◽

2008 Financial Crisis ◽

High Exposure ◽

Market Participants ◽

The 2008 Financial Crisis

The catastrophic economic damage caused by the 2008 financial crisis was unprecedented and caught many market participants by surprise. It raises the question: To what extent do institutional investors play a monitoring role in the banking industry? In this article, we investigate this underresearched area and provide evidence that gray institutions (i.e., banks and insurance companies) have more information about banks’ risk exposure to securitization than independent institutions do (e.g., investment companies and public pension funds) as gray institutions shied away from banks holding more private-label mortgage-backed securities or issuing riskier securitization deals before the crisis. We also find that the trading of gray institutions before the crisis can predict high-exposure banks’ abnormal returns around the Lehman Bankruptcy and subsequent 1-year stock performance. The trades of gray institutions are also significant and positively related to such banks’ operating performance during the crisis period.

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Destabilizing momentum trading and counterbalancing contrarian strategy by large trader groups

Review of Accounting and Finance ◽

10.1108/raf-03-2019-0054 ◽

2019 ◽

Vol 19 (1) ◽

pp. 83-106

Author(s):

Jang Hyung Cho ◽

Robert Daigler ◽

YoungHa Ki ◽

Janis Zaima

Keyword(s):

Futures Markets ◽

Trading Strategies ◽

Institutional Trading ◽

Momentum Strategy ◽

Content Type ◽

Contrarian Strategy ◽

Market Makers ◽

Contrarian Strategies ◽

Momentum Trading ◽

Individual Traders

Purpose The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets. Design/methodology/approach The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility. Findings Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders. Originality/value This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

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