Studies On Institutional Investors Behavior

The international financial market is characterized by the rapid development of institutional investors. Global portfolios not only promote the allocation of worldwide resources but also make the global finance system more fragile than before. Meanwhile, international financial market becomes to be dominated by institutional investors. Capital market, which is different from bank-leading market, responses rather rapidly, widely and directly to basic factors like risk. From 1990s the frequent financial crisis outbreak on capital market , which cause the scholars pay more attention and do more research on the financial market institutionalizing.The trend of organization in the global financial market impacts the stability of financial system by the following three ways: first, capital flow, induced by the capital allocation of institutional investors, accelerates finance globalization and increases system risk of global financial system; second, by analyzing structures and characteristics of balance sheets of banks and funds, we can judge whether the trend of organization increases or decreases the financial system risk; third, in the view of institutional investors, the author make research on how institutional investors affect financial system. Following a way of analyzing from general to special, from global financial market to emerging markets like China, the author do research on this issue in a microcosmic view.This paper mainly including the following context:The abstract introduce the background of the article, pointing out a phenomenon that institutional investors , as the new leader of the financial market have taken place of the commercial banks in all aspects whether from the scale of assets or the speed of development. The security market, especially in emerging countries witness a globalization trend. Accompanied by this phenomenon, the institutional investors change previous "home biased" asset allocation philosophy and invest more fund on global portfolios. The behavior of institutional investors convenient world capital freedom , attributing the optimal allocation of fund. Meanwhile they also enhance more fragility of finance system and trigger the financial crisis. Owing to small scale and low ratio of domestic shareholder value to global capital market, the emerging countries have become the center of financial crisis out-broken sites. So in order to carry on effective financial supervision and tackle with the financial market institutionalizing situation ,we should analysis the behavior of institutional investors and review it's impact on international financial system .The research also has great significance on the emerging country security market construction, keeping macro-economy stable in the course of market internationalization.We first define the concept on institutional investors and enumerate several types of them. Secondly we introduce the research outline, pointing out three levels of the impact of financial market institutionalizing on financial stability. The article analysis the problem from the third level, seeing about the behavior of institutional investors, showing their bounded rationality trait. Their investment strategy manifest such character that they take advantage of information and fund to manipulate stock price .Their speculation behavior also show "herd effect" and ......Finally we investigate the effect of institutional investors behavior on financial stability from the aspect of the bubble of asset and market liquidity crisis.Chapter one is a literature survey of institutional investor behaviors, plus a summary of the debate whether foreign institutional investors could stabilize the market. In chapter two, after analyzing the general behavior of institutional investor, the author analysis not only features of institutional investors, but also the two ways that institutional investors can affect the stability of financial system: "purposely" monopoly and arbitrage; and unconscious herding and positive feedback trading rules. In light of the theory of behavior finance, the author studies the flock of sheep behavior of institutional investor, its principle and history.The key feature of financial crisis is the dramatic fluctuation of price of assets plus the collapse of the market liquidity. In chapter three and four, financial crisis mechanism is introduced so that we can see how institutional investor behavior induces the break of bubble of assets and collapse of the market liquidity.On the basis of relationship between previous investor and financial crisis, it is pointed out that the key opinion of traditional financial theory is macroeconomic and business cycle which is important to financial crisis, although it has some research in investor behavior. With the rapid development of behavioral finance, the trend that doing research of financial crisis in investor behavior becomes popular and it seems to grow up rapidly. By mathematical models, the function is discovered that the institutional investor's herding behavior and positive feed back mechanism affects the assets bubble's forming, developing and breaching. Further, we make use of economic panic model of Kindleberger, feed back mechanism model of Blanchard and Watson, herding behavior model of Thomas Lux and financial risk transfer model of Lagunoff and Schreft to make the first model mathematically and particularly and track the course of institutional investor's herding behavior and positive feed back mechanism affects the assets bubble's breaching.Chapter four introduces the relationship of investor behavior and market liquidity, and discusses how the development of institutional investors affects market liquidity and market risk. Backed up by the model of Chitru S. Fernand and Richard J. Herring, the author introduces that how liquidity of market affects market crisis and how the institutional investor's herding behavior works when market expectation changes and crisis happens. Taking the disturbance of Europe bond and currency market in 1994 and liquidity crisis of LTCM of Russia in 1998 for example, institutional investor's behavior in liquidity crisis is analyzed.Finally, the author analysis the relation between institutional investors global distribution of the assets and the outbreak of international financial crisis. Based on past models, shifting from focusing on factors that cause adjustment of the global assets allocation, the author focuses on the mechanism that transmits financial crisis. He finds that the global portfolio adjustments transmit financial crisis by three channels: income effect, subsititution effect and information effect. Effects of income and substitution occur in the situation of wealth change, that is, the so-called "wealth effect"; Information majorly impacts on market expectation.The latest data demonstrates that institutional investors begin to make worldwide investments, with more global portfolio allocations involved. This may led to financial crisis by international arbitrage and make the crisis spread across nations. So, the chapter five mainly includes two parts: first, the way that institutional investor uses hedge fund to arbitrage, taking pound arbitrage in 1992 and Thailand crisis in 1997 for example; second, the wealth effect and information effect in global allocation of institutional investor. It is found that the global financial system is made more fragile by institutional investor behaviors, herding behaviors, and positive feed back mechanism, hence international crisis is easier to happen.During the process of emerging markets openings, institutional investors pioneer. Many emerging economies actively introduce the overseas institutional investors to internationalize their domestic equity markets. Chapter Six points out that the introduction of overseas institutional investors may increase the market volatility while their introducing the positive effects. The volatility is imported pertaining to the pricing efficiency of emerging markets when the foreign institutional investors treat the emerging market as an independent asset unit under their global asset allocation strategy. At the same time, the impact over the asset prices and liquidity from the herd effect and positive feedback trading of institutional investors are further strengthened by the great discrepancy between emerging markets and developed markets in the economic development, market depth, market breadth, institutions and so forth. Moreover, the chapter studies the roles on the happening; deepening and international contingencies of emerging market crises form the overseas institutional investors' market manipulation, herd behavior, and positive feedback trading. Meanwhile, the chapter also provides a new explanation on the 1994 Mexico crisis from the perspective of the institutional investors' behavior, unveiling the effect of institutional investors on the crisis given the above fact.Chapter Seven discusses the introduction of the QFII institution under the context of the stock market opening. The chapter gives a summary of the QFIIs' behaviors and characteristics, discovering that there is no obvious evidence about market manipulation by means of their advantage of money and information, though there exists a few subtle difference between their domestic and overseas investments. From a general perspective, the QFIIs assume the style of value investment despite the fact that the frequent rebalances and hot spots pursuing are found in their investment process. The paper proves that the QFIIs help to prevent the over-soaring of the market and stabilize it through analyzing the relationship among their share holdings, the value changes of the holdings, and the Shanghai Stock Composite Index.After empirical studying the herd behavior in Chinese stock market, the paper finds the evidence of herd-behavior among the QFIIs, which is less obvious than the domestic funds, approximately the same as their performance in overseas markets. Hence, generally speaking, the QFIIs adopt the value investing style without an severe impact on Chinese stock market. The paper also analyzes the potential QFII's risk factors affecting Chinese economy, and puts forward the proposals with regards the improvement of the QFII institution on the basis of last year's reforms.