Who Moves Markets in a Sudden Marketwide Crisis? Evidence from 9/11

Abstract

We compare reactions in the prices and trading patterns of common stocks and closed-end funds (CEFs), securities with substantially different investor clienteles, to the Sept. 11, 2001 terrorist attacks. When the market reopened 6 days later, retail investors sold and there were sharp price declines, even in assets with net institutional buying. In the subsequent 2 weeks, price reversals were substantially security specific and thus not simply due to improved systematic sentiment. Consistent with microstructure theory, comparisons between CEFs and common stocks show the speed of these reversals depended significantly on the relative quality and availability of information about fundamental values.

COVID-19 and investor behavior

“…Our results indicate that, in line with the torn image that press articles, media reports, and expert opinions paint these days, investors’ trading activities are also not clear-cut. Our findings stand in contrast to investors’ reactions to other shocks that increase uncertainty, such as terrorist attacks, which are associated with reduced flows to risky asset classes ( Wang and Young, 2020 ) and heavy retail investor selling ( Burch et al., 2016 ). While investors increase their trading intensity and more readily open new positions, we nonetheless show that investors act more cautiously following the drop of the Dow on March 12.…”

“…While the aggregate effect of the pandemic on the stock market ( Baker, Bloom, Davis, Kost, Sammon, Viratyosin, 2020a , Ramelli and Wagner, 2020 , Zhang et al., 2020 ) and the spending behavior of households ( Baker et al., 2020b ) have been documented, little is known about the behavior of retail investors during such a turbulent time. Considering that retail trades move stock prices in the direction of their trades ( Barber, Odean, Zhu, 2009 , Burch, Emery, Fuerst, 2016 , Han, Kumar, 2013 ) and in particular retail short selling has predictive ability for future (negative) stock returns ( Kelley and Tetlock, 2016 ), it is, however, important to investigate their behavior in these unprecedented conditions at the micro-level to better understand aggregate market outcomes. We investigate trading patterns and financial risk-taking of a large sample of retail investors based on their individual trading records during the outbreak of COVID-19.…”

“…Investor behavior in the aftermath of terrorist activity is associated with more risk averse choices, such as a reduced trading intensity and a reduced flow to risky assets ( Levy, Galili, 2006 , Luo, Chen, Lin, 2020 , Wang, Young, 2020 ). Burch et al. (2016) show heavy retail investor selling in the crisis period set off by 9/11 that drives down asset prices.…”

Intraday Volatility Spillovers among European Financial Markets during COVID-19

“…Black swan events, such as epidemics, could lead to a panic-selling response from international investors (Burch et al 2016). Nippani and Washer (2004) found a negative impact of the SARS period on Chinese and Vietnamese stock markets.…”

The impact of terrorist attacks in G7 countries on international stock markets and the role of investor sentiment

“…Such feelings can initiate a panic-selling response and may result in sharp stock market declines (Burch et al, 2016). Since stock prices incorporate investors' expectations, but may also react to sudden unanticipated shocks, the question of whether terrorism incidents affect stock prices and, if so, to what extent, has attracted increasing interest among scholars.…”