  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.
