Institutional Investors And Stock Market Volatility

Institutional investors are the development result of professional and social investment. It plays a decisive role in the conversion of savings to investment, improving the governance of listed companies and promoting the innovation of securities market. The rising and developing of institutional investors is an obvious feature of the international financial markets since the1980s. With the rapid development of world economy, the deepening of financial markets and the innovation of financial products, the institutional investors obtains a substantial development such as public funds, pension and insurance companies. With the development of institutional investors, the dominance of the international financial markets changed from individual investors to institutional investors.China established its stock market in the early1990s. With the rapid development of Chinese economy and the securities market, the size of Chinese stock market expanded rapidly and become one of the world’s second biggest stock market, second to the USA. But the stock market show frequent fluctuations and serious speculation in the process of development. It is well recognized that one of the most important reason is unreasonable investor structure in which the individual are the main investors. Raising the proportion of institutional investors which are more rational than individual investors is considered to be an important way to solve the problem of excessive volatility in Chinese stock market. Therefore, the government started to promote the development of institutional investors. After more than a decade of development, the quantity and type of institutional investors are increasing and the size of its assets expanded. The institutional investors become the dominant power in Chinese stock market, but the volatility of stock market did not become lower as the people expected.Therefore, the impact of institutional investors to the stock volatility in the process of its rapid development and the forming of diversified investors’structure is a significant issue for study. This study includes the analysis of the different impact on stock volatility because of different proportion of institutional investors’holdings, different market environments, and different types of institutional investors. This study will provide a solid basis for the supervisor to make the policy which will promote the development of institutional investors with a reasonable structure and stabilize the stock market. The Chinese stock market will develop stably, healthily and sustainably.By using TARCT model, balanced panel data model and unbalanced panel data model, this paper study the impact of institutional investors to stock market volatility based on China’s A-share market. In the first part of this article, a literature review was presented. Then, this paper made a study on the development process and the current situation of institutional investors in china and overseas. In the third part, this paper analyzed the mechanism of institutional investors affect market volatility based on Efficient Markets Hypothesis and behavioral finance. Based on the former theoretical analysis, the relation of institutional investors and stock market volatility is comprehensively test by empirical method from various perspectives. At the last part of this paper, policy recommendations were presented on the basis of theoretical and empirical analysis.Following is the conclusions:(1) Macro-level study shows that the expansion of institutional investors’size did not accompany with the more stable stock market. In the contrary, it increases the volatility.By constructing institutional investors relative size index represented by ratio of the total net assets of funds and A-share market total tradable value, the study found that there is a significant positive relation between the institutional investors’relative size and the stock market volatility. The volatility of stock market increases with the expansion of the institutional investors’relative size. This result shows that the institutional investors make the stock market more volatile.(2) Micro-level study shows that in different stages of development, the relation between institutional investors and stock market volatility is different.Based on the development of funds, sample period is divided into three stages. By using the sample with more than five percent of its shares are held by institutional investors, the study show that:(i) In the flat stages of development, the volatilities of stock return are unrelated to the institutional holdings, but correlation of the change of institutional holdings and the stock return volatility is negatively. This shows that the institutional investors play a stable role in the flat stage.(ii)In the rapid development stage and adjustment stage, both the institutional holdings and its changes are positively correlated with the volatility of stock returns, indicating that institutional investors holdings exacerbate the volatility of stock returns.(3) The relation of institutional investors and stock volatilities is different in bull markets and bear markets.Dividing the period into bull and bear market by using non-parametric method, the paper examine the relation between institutional investors and stock return volatilities in full sample period and different stages of development under different market environment. The regression result shows that:(i) In the full period, institutional investors have no impact to stock volatility in bear market, while in bull market institutional investors’behave exacerbates the volatility of stock market.(ii) Phased study found that the stabilization effect of institutional investors mainly appeared in bull market during the flat stages. The study of rapid-development stage shows that institutional investors make the stock market more volatile both in bull market and bear market. The more the institutional holds, the higher the volatility. There is no evidence shows that the institutional investors fluctuate the stock market in bull market during adjustment stage, but they are still the main force that make the market more volatile.(4) The study on different types of institutional investors respectively show that the impact of different type of institutional investors on stock volatility is different.(i) In full sample period, only the investment behaviors of insurance companies and QFIIs decrease the stock volatility, but it is not significant. The behaviors of other three institutional investors increase the volatility,(ii) The study based on different market conditions show that in bear market the funds and pension exacerbate the volatility. There is also weak evidence show that QFII increases the volatility. The regression based on the changes of institutional holdings show that the transaction of funds fluctuate the market both in bear and bull market. In the bear market the transaction of insurance companies also destabilize the market.(iii) Funds,pension and securities companies behavior increase the volatility in the soaring market. In the collapse market, there are no affect in all types of institutional investors.The innovation of this paper:Firstly, this paper uses relative size of institutional investors as index to study the relation of institutional investors and stock market volatility. Secondly, unlike other literatures using all the listed companies which are held by institutional investors as samples, this paper uses the samples which are institutional investors with more than certain proportion. Thirdly, this paper determine bull market and bear market by using non-parametric method and test the relation between the institutional investors and stock market volatility in different market conditions. Fourthly, instead of hold the institutional investor as a whole in the study, this paper studies the main types of institutional investors respectively.