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Chiyachantana, Chiraphol, Pankaj K. Jain,
Christine Jiang, and Robert A. Wood,
International Evidence onInstitutional Trading Behaviorand Determinants of Price Impact
Journal of Finance, (2004), 59, 2, 865-894.
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International Investments and
Transaction Costs
Cross-border portfolio flows grew almost 200
times in the past 30 years (IMF)
Important role of transaction costs on
international portfoliosAverage one-way trading costs of 88.2 bp
Semi-annual turnover > 353 bp in cost
Average annual portfolio return is 1228 bp
Trading costs alone are 30% of return
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Transaction Costs across Countries
Perold and Serri (1998) Domowitz, Glen and Madhavan (2001, 2002)
Jain (2002)
Keim and Madhavan (1995, 1996, 1997)
Chan and Lakonishok (1993, 1995, 1997)Conrad, Johnson and Wahal (2001,2002)
Jones and Lipson (2001) and Chakaravarty,
Panchapagesan, and Wood (2002)
Institutional Trading within the U.S.
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Data
Institutional trading data across 39 foreign
countries from Plexus Group In 2000, Plexus group provided consulting
services to 180 clients who collectively
managed assets valued at nearly $4.5 trillion in68 countries.
Two sample periods: 1997-98 (bullish phaseBHR = +17%) and 2001 (bearish phase BHR=25%)
Datastream International stock market indices
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Previous studies in bull markets CRSP equal weighted buy and hold returns including
dividends for their sample periods are 31.13 percent
in Holthausen, Leftwich, and Mayers (1987); 75.27
percent in Holthausen, Leftwich, and Mayers (1990);
124.20 percent in Keim and Madhavan (1995);214.34 percent in Keim and Madhavan (1996);
92.10% percent in Keim and Madhavan (1997);
21.40 percent in Chan and Lakonishok (1993, 1995);
and 58.09 percent in Chan and Lakonishok (1997).All the numbers suggest strongly bullish market
conditions. The only exception is 6.25 percent in
Kraus and Stoll (1972), which can be classified as
only a mildly bearish market condition. 5
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Methodology - Institutional Trading Costs
Trading cost = Total Price impact + Commission Price impact: Compare execution price with an
unperturbed decision or release price prior to a
decision, then adjust for market-wide return (now a days betaadjustment is also needed)
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Table III A. Price impact of
institutional trades
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Established Result are Refuted!
Asymmetric price impact (a measure oftransaction costs): usually BUY > SELL
Reasons Cited usually:
Buys more informed than Sells Institutions averse to short selling
Our Claim:
Market sentiments drive asymmetry
SELL impact > BUY impact in 2001,
although Buy:Sell = 50:50 in 1997-98 & 2001
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Figure 1.(A). Market sentiment and price impact of institutional purchases and sells
This figure plots the average price impact of purchases, price impact of sells, and the contemparaneous market returns. The
vertical line divides 1997-98 and 2001.
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1997
01
1997
02
1997
03
1997
04
1997
05
1997
06
1997
07
1997
08
1997
09
1997
10
1997
11
1997
12
1998
01
1998
02
1998
03
2000
12
2001
01
2001
02
2001
03
2001
04
2001
05
2001
06
2001
07
2001
08
2001
09
1997-98 Calendar Time 2001
PercentageReturn/Pric
eimpa
Purchase
Sell
Market
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Figure 2. Market Condition and Asymmetry ofPrice Impact in 36 countries in 97-98 and 2001
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
-90 -75 -60 -45 -30 -15 0 15 30 45 60 75 90
% Buy and Hold Returns
%B
uyP
riceImpactminus%S
ellP
riceImpact
France 01
France 97-98
HK 97-98
HK 01
US 97-98
US 01
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Table IV. Regressions
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Determinants of Price Impact: Regressions
Market Sentiment => Drives asymmetry
Direction of decision
Firm characteristics (market capitalization ) Complexity of decision
Difficulty of orders
Duration and # of brokers Nature of foreign markets
(developed/liberlaized versus emerging )
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Table V. Global shifts in Costs
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Conclusion
Asymmetry in Price Impact is a function of marketconditions
Price Impact differs across different types ofcountries, market conditions, order types, firm types,
and broker types Institutions can use the results to strategically place
orders so as to minimize transaction costs andimprove return-performance
Future Research: Price Impact as a predictor of market sentiments
Theoretical models ought to consider market sentiment