Essays On Speculative Trading Of Institutional Investors

The scale of institutional investors expands rapidly since 2001 when authorities decided“leapfrog development of institutional investors”.However,empirical evidence in China's A share market indicates that institutional investors exhibits strongly speculative propensity rather than the role of price discover or market stabilizer.Extant literature concentrates on traditional opinion instead of institutional investors' speculative propensity.This paper thoroughly studies institutional investors' speculative trading,including characters,incentives,influences et al.This paper provides implications of both theoretical work and industrial practice.In the first part,this paper studies typical speculative trading of mutual funds,fad-investing,in China's market from 3 aspects.Firstly,this paper find that speculative trading of mutual funds fails to plays the role of price discoverer or price stabilizer.This paper classifies funds' new top 10 stocks into hot stocks and out-of-favor stocks.Empirical results show that hot stocks have significant negative return in subsequent 1 month and 1 quarter.This is due to the overvaluation induced by institutional investors' speculative trading of fad-investing,which is correct by the market later.Secondly,this paper proves that speculative trading of fad-investing cannot bring supreme performance.This paper defines speculative propensity of a certain mutual fund according to the number of hot stocks and out-of-favor stocks in its top 10 holding.Empirical results indicate that investing on out-of-favor stocks helps performance improvement and investing on hot stocks impairs performance.Thirdly,this paper finds that career concern might be the source of speculative trading.Using 4 proxies of career concern(past performance,manager's experience,company's separation ratio and persistence of top holding),this paper finds that career concern significantly explains speculative propensity.Managers participate into risky investment to gamble for the high return opportunities and save their positions.In summary,career concern drives manager's speculative propensity.However,their speculative trading neither chooses right stocks nor brings better performance.In the second part,this paper studies speculative trading of all institutional investors and discusses its role in asset pricing from 3 points.Firstly,this paper proves that institutional investors have strong speculative propensity.Using large trades beyond 400,000 RMB to construct proxy variable INS_SPC of institutional investors' speculative trading,this paper find strong speculative characteristics of this proxy.Secondly,this paper find that institutional investors' speculative trading significantly influence stock price,even in A share market which is dominated by retail investors.However,institutional investors disturb rather than stabilize stock prices.The variable of INS_SPC is positively related to contemporaneous return and negatively related to return in next month.The coefficient of interaction between value uncertainty and INS_SPC is significantly negative.This is due to the fact that value uncertainty strengthens the impact of INS_SPC.Thirdly,based on conclusions in former part,this paper constructs SPC factor using INS_SPC.SPC factor is significantly positive in sample window and the return of SPC cannot be fully explained by Fama-French 3 factors and reversal factor,which is always used in China's A share market.Including SPC factor improves the explanatory power of Fama-French 3 factors.In the third part,using institutional investors' speculative trading,this paper studies reversal effect which is widely documented in China's A share market.Firstly,this paper proves that there is no momentum which widely observed in developed market.China's A share market exhibits strong reversal with relatively short horizon(less than 6 months).This paper constructs REV factor using Jegadeesh(1990)and REV is significantly positive.Secondly,this paper finds that institutional investors' speculative trading might be the reason of reversal.REV turns into insignificant when SPC is introduced into regressions.Moreover,this paper examines the predictability of past performance using Fama-Macbeth regression.Results implies that the explanatory power of past performance disappears when INS_SPC is added.This paper also excludes the possibility of liquidity reason by forming 5*5 liquidity-past performance portfolios.Liquidity variables include Amihud,Gamma and liquidity ?.This paper has 3 innovative contributions.Firstly,this paper corrects the traditional impression of institutional investors and enriches the understanding of institutional investors: trading based on fundamental value rather than speculative reasons helps improving fund performance.Secondly,few former literatures directly study how institutional investors' speculative trading influences stock price and funds' performance.Using top holding data and large trades data,this paper contribute to related fields.Thirdly,this paper attributes reversal in A share market to institutional investors' speculative trading,which is never recorded in extant literatures.