| From a global perspective, securities investment fund has become one of the most important asset managers for 20-30 years of history. In recent years, funds have made a tremendous progress in China. After 2005, fund industry was made a rapid growth and gradually became a major influence in the stock market. At the same time, China's stock market has experienced rapid growth as well as high volatility. It is easy to raise some questions:Was the market's rapid expansion led to the rapid development of China's fund industry? Or on the contrary, did funds' investment activities lead to higher market volatility? And what is the intrinsic link between the two phenomena?In this dissertation, I studied fund investment behavior and its stock price effects systematically. The study can be divided into theoretical and empirical levels. The theoretical study aims to understand the basic law of funds'investment behavior and its impact. In which, I studied fund's principal-agent problem to clarify the constraints of investment and motivation of main participants. Study on funds asset management and investment decision-making process is to make clear the basic investment ways used by funds. Study on the relationship between funds' trading and stock price and stock price fluctuation is to build a theoretical foundation and construct a basic framework for empirical research. The empirical research concentrates on the behavior of funds'investment strategy and its stock price effects using the microscopic analysis method. On the other hand, I used aggregate data to research the relation between funds investment activities and market volatility. According to the theoretical analysis and results of empirical test, the paper's main conclusions are as follows:(i) The investment behavior of the funds is subject to market volatility, regulatory policy, market reputation, and other participants'activities. For the forgoing reasons, funds management and investment decisions is in a dynamic adjustment process. Funds'investment strategies which include asset allocation, security selection, investment styles drift and so on are adjusted according to the change of market condition. Reputation mechanism may make the funds managers pursue short-term performance and thus may lead to funds herding.(ii) This study documented a strong positive relation between changes in funds'ownership and returns measured over the same period. The source of this positive correlation arises from price pressure caused by funds'trade and mutual fund managers'forecasting intra-period price changes. There are two reasons which lead to price pressure effect. The first is that trades initiated by funds require price concessions because they push individuals and other liquidity providers away from their preferred inventory or portfolio positions. The second is that information revealed through trading is primarily responsible for price changes and that due to economies of scale, funds are better informed than other investors. I didn't find funds to conduct systematic evidence of positive feedback trading.(iii) In China, the Funds'investment activities and the stock market fluctuations affected each other. In the past 3 years, assets of securities investment funds increased significantly, the funds'investment activities have started to impact on the volatility of the stock market. The empirical result shows that the funds did not play a stabilizing role in the market and did not significantly increase stock market volatility at the same stage, either.According to the conclusions, this study puts forward some policy recommendations such as developing diversity of institutional investors, standardizing funds'investment behavior, improving fund disclosure rules and enhancing the transparency of policy-making to regularize funds'investment behavior and improve China's stock market efficiency.In accordance with the basic viewpoint of market microstructure theory, stock prices is not only a macroeconomic phenomenon, but also an optimize results of the economic behavior of traders. So this paper studies the fund investment behavior and its stock price effects in micro perspective. As to the relationship between funds'investment activities and stock market volatility, this paper studied with aggregate perspective which makes researches have micro foundations and the underlying economic and financial significance as well.In empirical part, this paper used a classic method put forwarded by LSV to test fund herding and employ a methodology to indirectly estimate covariances between changes in share held by funds and returns over shorter intervals. And I used Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model (MV-GARCH) and Vector Autoregressive Model (VAR) to test the dynamic relationship between funds'investment activities and China stock market volatility of different stages. At last, I made use of multi-dimensions data, such as Wind-Database, GTA-Database, and data from Fund Supervisory and Surveillance Information System (FSSIM) of CSRC. In which, I used daily data form FSSIM makes my empirical conclusion more reliable and convincing.In summary, this paper researched the relationship between investment of funds and its impact on stock price in China. Based on a historical logic, the study took a full view to analyze the characteristics of securities investment fund and China's securities market in different stage. The research findings allow us to overcome the lack of institutional investors and improve the efficiency of China's securities market as much as possible.
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