Mutual Funds' Trading Behavior And Stock Market Volatility

Institutionalization of investors is the basic trend of development of the international stock markets. With the rapid growth of China's securities market, the funds, represented as institutional investors have accounted for holding 40%-50% of market capitalization, whose impact on the market is growing. Especially in recent years, influenced by the macro-economic cycle fluctuations and the global financial crisis, China's stock market experienced a rapid alternation between super "bull market" and "bear market". With the market mood changing from "frenzy" to "panic", the stock market itself shocked severely. In this volatile market environment, was the funds intensified or stabilized the market? Is Market volatility derived from systemic shocks or the adjustments of the portfolio by the funds? Whether the stock volatility caused by buying behavior of the funds has any relation with the ups and downs of the stock market? If relevant, how they linked and whether it showed some periodicity? These problems are key propositions related to China's securities market to the funds acting as the representative of institutional investors.This paper selects the top ten heavily holding stocks by funds between 2007-2009 as the samples for analysis, which cover different industries and have different attributes. At the same time, we made descriptive statistics of the samples according to the proportion of the funds recording the buying or selling behavior in different stages.In the first part, we used wavelet analysis to study the volatility of samples'features at different stages, from the micro-level. Empirical results show that the stock's volatility will decline when the funds increase or hold on their ware-house stock rate but increase when the funds decrease the rate, which shows the characteristics of non-symmetric market. Specifically, heavy-weight stock influenced by the fund severely, adding more in the portfolio stabilized fluctuations with less noise trading, while reducing phase interferences the market sentiment, increasing volatility and noise trading even induced herding behavior in a certain degree. The counter-cyclical stocks,basically, funds' behavior has little influence on it, but its volatility also increases when the funds reduce proportion, for at this time the market is more complex and pessimistic, medium and small investors have a certain "irrational" investment behavior and the volatility became even more significant when the market fell. In the other hand, high-growth stocks are showing completely different characteristics, the Fund's "positive feedback" strategy adding-stock-behavior formed a "chase" to some extent, making a substantial increase in stock volatility, and as investors have mixed growth reviews on stocks, making noise trading relatively obvious in the entire period. For the small-cap growth stocks, firstly, small-cap one is vulnerable to impact of large trading volume, secondly, investors' different opinions on its future growth led to the different situation of noise trade, more for high-growth company and less for stable-growth company. Since different stocks turn out different properties, we should analyze them combining specific context in practical application.In the second part, we analyzed from the financial market's level. Firstly applying Spillover-Effect, the results show that there is a certain relationship between the volatility of the stocks and the stock market, but the effect is not obvious. Thus we consider using of cross-spectral analysis, found that this volatility is mainly caused by the adjustment of proportion the funds'portfolio, while the market volatility has little effect on stocks' volatility. In other words, the stock volatility is mainly caused by the transactions arising from the Fund.At last, we made some suggestion to how to promote the development of our capital market and standardize funds'behavior to the regulatory authorities based on our empirical study results.