Institutional Synchronization Theory: A Framework for Market Dynamics under Common Institutional Constraints

Abstract

We develop Institutional Synchronization Theory (IST), an equilibrium framework in which market-wide synchronization arises endogenously as the consequence of institutional optimization under a common constraint. Heterogeneous institutions solve their own mean-variance problems but face the same regulatory environment. A change in the common constraint enters every institution’s optimization problem through a shared gradient term, aligning individually optimal portfolio adjustments in direction and concentrating aggregate institutional demand. Market clearing translates this demand concentration into amplified price responses, elevated return comovement, and stronger cross-asset volatility transmission. We term the resulting equilibrium a synchronization equilibrium. The theory yields four chained predictions — institutional demand concentration, dynamic return correlation, volatility spillovers, and temporary liquidity deterioration — that we evaluate using the 2026 Korea Exchange trading halt cluster as a natural experiment. IST is the first component of a broader research program on Institutional Market Dynamics (IMD) that reinterprets comovement, spillovers, liquidity fragility, and price impact amplification as manifestations of a single underlying mechanism.

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