international evidence on institutional trading behavior and determinants of price impact by...

7/29/2019 International Evidence on Institutional Trading Behavior and Determinants of Price Impact by Chiyachantana Et Al. (2004 JF)

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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

7


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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

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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

13


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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

international evidence on institutional trading behavior and determinants of price impact by...

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