Abstract
We investigate the trading of mutual funds and pension plan sponsors on days of extreme market-wide price movements. Using a proprietary database of institutional trading activity, we find that institutions are net sellers when markets are rising and net buyers when markets are falling. Results are driven by trades arising from orders initiated prior to the event days, and suggest that the effects we document are due to implementation rather than position decisions. We also provide some evidence that positions established on these days are marginally profitable. Taken together, our results suggest that institutions do not exacerbate the previously documented distortion of prices during periods of extreme market movements and may even provide a degree of price stability. The actions of institutions on these days are consistent with a focus on long term price changes and a desire to minimize implementation costs.
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