Investor Heterogeneity and Liquidity

Kalok Chan, Si Cheng, Allaudeen Hameed

Research output: Contribution to journalArticlepeer-review

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 the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. Additionally, 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.

Original languageEnglish (US)
JournalJournal of Financial and Quantitative Analysis
DOIs
StateAccepted/In press - 2022
Externally publishedYes

Keywords

  • Classification: G12
  • G23
  • Illiquidity Premium
  • Investor Heterogeneity
  • Liquidity
  • Volatility of Liquidity

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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