Large Investors and Liquidity: A Review of the Literature

A growing share of financial assets are held by large institutional investors whose desired trades are large enough to move prices in markets. Because large investors ’ trades have “price impact”, asset markets are not perfectly liquid from their perspective. This illiquidity is likely to influence their decisions of which assets to hold and which assets to trade, and may influence how assets are priced. These insights on illiquidity and large investors motivated Pritsker’s (2002) modelling of liquidity in a market with large investors. This article is a companion piece to Pritsker (2002) which reviews the literature on asset liquidity and on large investors and suggests ways in which these research areas can be combined. 1