Chiyachantana, Chiraphol, Pankaj K. Jain, Christine Jiang, and Robert A.

Wood,

International Evidence on Institutional Trading Behavior and Determinants of Price Impact

Journal of Finance, (2004), 59, 2, 865-894.

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 portfolios
Average 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

Transaction Costs across Countries

Perold and Serri (1998) Domowitz, Glen and Madhavan (2001, 2002) Jain (2002)

Institutional Trading within the U.S.

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)

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 in 68 countries. Two sample periods: 1997-98 (bullish phase BHR = +17%) and 2001 (bearish phase BHR= 25%) Datastream International stock market indices

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 5 only a mildly bearish market condition.

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 beta
adjustment is also needed)

Table III A. Price impact of institutional trades

Established Result are Refuted!

Asymmetric price impact (a measure of transaction 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

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.

1.2 1.0
Percentage Return/ Price impact

0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 1997-98 Calendar Time 2001
19 97 0 19 1 97 0 19 2 97 0 19 3 97 0 19 4 97 0 19 5 97 0 19 6 97 0 19 7 97 0 19 8 97 0 19 9 97 1 19 0 97 1 19 1 97 1 19 2 98 0 19 1 98 0 19 2 98 0 20 3 00 1 20 2 01 0 20 1 01 0 20 2 01 0 20 3 01 0 20 4 01 0 20 5 01 0 20 6 01 0 20 7 01 0 20 8 01 09

Purchase Sell Market

Figure 2. Market Condition and Asymmetry of Price Impact in 36 countries in 97-98 and 2001
2.50 2.00

1.50

% Buy Price Impact minus % Sell Price Impact

US 97-98 1.00 France 97-98

0.50

0.00 -90 -75 -60 -45 -30 -15 -0.50 US 01 -1.00 HK 97-98 HK 01 France 01 -2.00 -1.50 0 15 30 45 60 75 90

-2.50 % Buy and Hold Returns

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 )

Table V. Global shifts in Costs

13

Conclusion
Asymmetry in Price Impact is a function of market conditions Price Impact differs across different types of countries, market conditions, order types, firm types, and broker types Institutions can use the results to strategically place orders so as to minimize transaction costs and improve return-performance

Future Research:
Price Impact as a predictor of market sentiments Theoretical models ought to consider market sentiment