Institutional Investors And Return Time-series Predictability Of Stock

Recently, many scholars have found that institutional investors tend to follow positive feedback trading strategies, i.e., to buy previous winners and sell previous losers. In additions, the remarkable phenomena of short-term reversal and mid-term momentum in the western developed countries are also documented in the literature. Based on the above empirical results, this paper attempts to investigate the relationship between the behavior of institutional investors and the momentum /reversal trends of the stock market, and to contrast the momentum/reversal trends of the stock market in China. Furthermore, we also test the relationship between the investors' heterogeneity and return time-series predictability from momentum effect and contrarian effect in order to provide the investment strategies to the investors.Based on a panel data of Chinese listed firms during 2000-2007, this paper adopts the Investment portfolio analysis, the time-varying analysis and the Autocorrelation analysis. The results show that in the short term, the information feedback of institution investors is rational and the great overreaction of individual investors push the whole market into the irrational condition. But in the long term, individual investors tend towards rational, and institution investors underreact the new information which induces the whole market to underreact. This studies partially sustain that the institutional investors can impress the information and level off the stock market.This paper finds that choosing different investment strategies can obtain high yield. In the short term, when choosing negative feedback trading strategy, we can obtain above 10% returns in excess of market average return. In the long term, when choosing positive feedback strategy, we can obtain about 5% returns in excess of market average return.