The Price Impact Response of Institutional Trades: Bull and Bear Market Analysis

Abstract: Institutional traders face significant transaction costs when they have large orders to fill on behalf of their clients. A driving force behind the price impact of these orders is the available market liquidity at the time of the trade. Institutional traders with buyer-initiated (seller-initiated) trade packages during rising (falling) markets will face steeper and steeper price impacts as market liquidity is exhausted at current prices. As a result, the price impact response to market level returns or firm level excess returns is positive (negative) for buyer-initiated (seller-initiated) trade packages.

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Authors: James Schultz