Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2020-02-04 Number: 20-007/II Author-Name: Marc van Kralingen Author-Workplace-Name: Aegon N.V. Author-Name: Diego Garlaschelli Author-Workplace-Name: Lorentz Institute Author-Name: Karolina Scholtus Author-Workplace-Name: Erasmus University Author-Name: Iman van Lelyveld Author-Workplace-Name: Vrije Universiteit Amsterdam Title: Crowded trades, market clustering, and price instability Abstract: Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability. Classification-JEL: G02, G14, G20 Keywords: crowded trading, tail-risk, financial stability File-URL: https://papers.tinbergen.nl/20007.pdf File-Format: application/pdf File-Size: 657140 bytes Handle: RePEc:tin:wpaper:20200007