Research On The Institutional Investors And Stock Market Stability

Financial stability and security are with more and more attention since the financial crisis in 2008. As an important part of the capital market, stock market is not only related to the nation's development strategy, but also directly linked to the profit and loss of investors as well as the healthy development of the real economy. Institutional investors, as one of the important participants in the capital market, are not only an indispensable part of the stock market, but also an intermediary between institutions,individual investors and the stock market. Based on the developed experience, investors institutionalization is an inevitable trend of capital market. The impact of institutional investors on stock market will increasingly deepen with the expansion of institutional investors scale.Following the path of developed capital market, China has launched a series of management policies to stimulate the development of institutional investors since 2001. Institutional investors, represented by mutual funds, have developed rapidly in the following years. However, A-share stock market witnessed twice huge price movements in 2007 and 2015, and the instability of stock market has not been mitigated with the development of institutional investors.It raises the reflection of the role institutional investors are playing in capital market. Do they stabilize the stock market? Are there differences among different institutional investors? Are institutional investors rational?If not, what is the impact they have on stock market?To answer the above questions, this thesis analyzes the impact of institutional behaviors on stock market stability from three perspectives,which are stock price volatility, information efficiency and stock price crash risk respectively. This paper obtains several findings as follows:Firstly, from the perspective of stock price volatility, this paper finds weak impact of institutional investors in bear market, while there is positive relationship between institutional holdings and stock price volatility in bull market. As for different types of institutional investors,the mutual funds aggravate the instability both in bear and bull market,while QFII, insurance company and the legal may reduce the volatility to some extents.Secondly, from the perspective of informational efficiency, China's stock market shows low level of informational efficiency. The stock price synchronicity is generally high on China's stock market compared with developed ones, and the heterogeneous information of the companies has not been reflected in the stock price effectively. Stocks with a relatively high percentage of institutional shareholding are lower in stock price synchronicity, but the increase of institutional investors' trading fails to reduce the stock price synchronicity. The institutional holding and trading behaviors are different in mechanism of impact on the stock price synchronicity, and have different impacts upon the stocks at different scales.The holding and trading behaviors in insurance, trust, pension fund and QFII will reduce the stock price synchronicity, which is good to improve the market informational efficiency. However, as for the mutual funds in China, they aggravate the market instability.Thirdly, mutual funds in China show more herding behaviors compared with developed capital market. Herding behavior of mutul funds managers are proved to be irrational herdings that follow the flocks blindly.This means that the herding among funds managers is irrational, and it reduced the informational effeiciency. By studying the relationship between funds hehaviors and stock price crash risk, this paper finds that funds holding will increase the future stock price risk, it can be explained by the collusion of funds managers and the managements to hide the negative information. The funds' herding behavior will also increase the risk of stock price crash, and it will aggravate the impact of institutional holdings on stock price crash risk as well.The innovations and achievements of this dissertation are summarized as follows:1. A model of stock price volatility is constructed to study the impact of different types of institutional investors on market stability under different conditions. The empirical analysis shows that the influence of institutional investors on stock price volatility is different under different market conditions; and for different types of institutional investors,securities investment funds and social security funds fail to reduce the stock price volatility, while QFII, insurance companies and the legal which were ignored by previous studies may stabilize the market to some extents.2. Several multivariate linear models are constucted to test the holding and trading impact on informational efficiency respectively. Based on this,this paper further study the impact of different institutional investors on stocks with different scales and stock price synchronicity. The empirical analysis shows that all types of institutional investors holding behavior can improve the informational efficiency, while the impact of trading differs.Specifically, the trading the funds and the legal reduces the informational efficiency of the market, and the transaction behavior of QFII has a positive effect on informational efficiency.3. Several models of stock price crash risk are constructed to test the cross effects of mutual funds behavior on market stability. The empirical analysis shows that mutual funds in China show obvious herding behavior,and their herding behavior is irrational. What is more, the funds holdings will increase the stock price crash risk, and their herding behavior will further aggravate it.