Institutional Investors and Stock Market Volatility

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.

Inverse Cubic Law for the Probability Distribution of Stock Price Variations

The probability distribution of stock price changes is studied by analyzing a database (the Trades and Quotes Database) documenting every trade for all stocks in three major US stock markets, for the two year period Jan 1994 -- Dec 1995. A sample of 40 million data points is extracted, which is substantially larger than studied hitherto. We find an asymptotic power-law behavior for the cumulative distribution with an exponent alpha approximately 3, well outside the Levy regime 0< alpha <2.Comment: 5 pages, 4 figures, RevTex 2 figures adde

Institutional investors and stock market volatility

Statement of responsibility on t.p. reads: Xavier Gabaix, Parameswaran Gopikrishnan, Vasiliki Plerou, H. Eugene StanleyOctober 2, 2005. Revised: May 12, 201

Quantifying Stock Price Response to Demand Fluctuations

We address the question of how stock prices respond to changes in demand. We quantify the relations between price change $G$ over a time interval $\Delta t$ and two different measures of demand fluctuations: (a) $\Phi$, defined as the difference between the number of buyer-initiated and seller-initiated trades, and (b) $\Omega$, defined as the difference in number of shares traded in buyer and seller initiated trades. We find that the conditional expectations $<G >_{\Omega}$ and $_{\Phi}$ of price change for a given $\Omega$ or $\Phi$ are both concave. We find that large price fluctuations occur when demand is very small --- a fact which is reminiscent of large fluctuations that occur at critical points in spin systems, where the divergent nature of the response function leads to large fluctuations.Comment: 4 pages (multicol fomat, revtex