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Crowded Trades, Market Clustering, and Price Instability

Aegon N.V., Aegonplein 50, 2591 TV Den Haag, The Netherlands
Lorentz Institute for Theoretical Physics, Leiden University, Niels Bohrweg 2, 2333 CA Leiden, The Netherlands
IMT School of Advanced Studies, Piazza S. Francesco 19, 55100 Lucca, Italy
Econometric Institute, Erasmus University Rotterdam, Burg. Oudlaan 50, 3062 PA Rotterdam, The Netherlands
Data Science Hub, De Nederlandsche Bank, Spaklerweg 4, 1096 BA Amsterdam, The Netherlands
Department of Finance, VU Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands
Author to whom correspondence should be addressed.
These authors contributed equally to this work.
Academic Editor: Joanna Olbryś
Entropy 2021, 23(3), 336;
Received: 6 February 2021 / Revised: 8 March 2021 / Accepted: 9 March 2021 / Published: 12 March 2021
(This article belongs to the Special Issue Entropy-Based Applications in Economics, Finance, and Management)
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, based on a comparison with the expected crowding in a null model where trades are maximally random while still respecting the empirical heterogeneity of both stocks and investors. We investigate the effect of crowded trades on stock price stability and present evidence 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. View Full-Text
Keywords: crowded trading; tail-risk; financial stability; entropy crowded trading; tail-risk; financial stability; entropy
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MDPI and ACS Style

van Kralingen, M.; Garlaschelli, D.; Scholtus, K.; van Lelyveld, I. Crowded Trades, Market Clustering, and Price Instability. Entropy 2021, 23, 336.

AMA Style

van Kralingen M, Garlaschelli D, Scholtus K, van Lelyveld I. Crowded Trades, Market Clustering, and Price Instability. Entropy. 2021; 23(3):336.

Chicago/Turabian Style

van Kralingen, Marc, Diego Garlaschelli, Karolina Scholtus, and Iman van Lelyveld. 2021. "Crowded Trades, Market Clustering, and Price Instability" Entropy 23, no. 3: 336.

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