Essays on asset pricing: Trading behavior, information spillover and microstructure order flow

Price movement is one of the central themes of asset pricing. This dissertation consists of three essays investigating critical factors that drive price movement, focusing on the role of institutional investors. The first paper studies how trading behavior affects price movement and documents the role of institutional clienteles in comovement. It reveals that stocks comove more than their fundamentals would suggest, and a major driver of this excess comovement is correlated institutional trading patterns. The second paper concerns what drives price movement from the angle of cross-market information spillover. This paper finds institutional investors who buy commercial loans outperform their peers in the stock market. Moreover, it suggests that the release of private information in loan renegotiations may lead to speculative trading patterns in the equity market. This trading behavior helps superior information to be transmitted from the loan market to the equity market. In the third paper, the price formation process is studied from a microstructure point of view. The paper proposes an econometric model to estimate volatility using tick-by-tick data. It shows that both duration and bid-ask bounce are informative in estimating realized volatility. This suggests microstructure order flow is also an important driver of price movement. Taken together, this dissertation improves our understanding on price movement from three different perspectives. The results have important implications for asset management, as well as market regulation.