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Institutional Investors and Stock Market Volatility
Xavier Gabaix (Boston University, National Bureau of Economic Research), Parameswaran Gopikrishnan (Boston University, National Bureau of Economic Research), Vasiliki Plerou (Boston University, National Bureau of Economic Research), Eugene Stanley (Boston University, National Bureau of Economic Research)
Abstract: We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets.Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals.We derive the optimal trading behavior of these investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.