This paper investigates the relation between crowded trades, those in which many investors hold the same stocks possibly exhausting their liquidity provision, and institutional investors’ trading activity on a set of twelve well-known stock market anomalies. We find that anomaly risk-adjusted returns appear to be concentrated among the most (least) crowded stocks for the long-leg (short-leg) portfolio. Moreover, we find that our results remain significant after publication dates and are stronger among holdings of transient institutions. We hypothesize that crowded equity positions in anomaly stocks increase institutional investors exposure to crash risk, liquidity risk, and fire sales. Our findings are consistent with this hypothesis and suggest that crowding adds a new consideration to the limits of arbitrage.
Fabio Moneta is an Associate Professor and a Royal Bank of Canada Fellow of Finance at the Telfer School of Management, University of Ottawa. Before joining Telfer, he was an Assistant Professor of Finance at the Smith School of Business, Queen’s University. He received his PhD in Finance from the Carroll School of Management, Boston College. He also holds an MSc in Finance from CORIPE Piemonte (Turin, Italy) and a BA in Economics from the University of Pisa in Italy. His research interests concentrate on investments, institutional investors’ trading behavior, mutual fund performance, and empirical asset pricing. He has published articles in leading journals including the Critical Finance Review, Journal of Financial and Quantitative Analysis, Journal of Empirical Finance, and Management Science. He is also the author of two book chapters including one published in the Handbook of Fixed Income Securities, edited by Pietro Veronesi. His research has been funded by the Social Sciences and Humanities Research Council of Canada and the Canadian Securities Institute Research Foundation, and featured in various media outlets such as Bloomberg Businessweek and Morningstar.
The seminar will be held in English.
Major information: Fabio Moneta (Organizer: Prof. Giulia Baschieri - giulia.baschieri@unibo.it).