An Empirical Study Of Institutional Trading And Stock Returns In China Stock Market

Institutional investors play more and more important roles in the development of Chinese capital market. So, the behavior of institutional investors has aroused great interest of the market as well as in the academia. It is an important topic in financial market study, especially in empirical study.The relationships between institutional investors'behavior and securities returns have always been the focus of finance studies. An important question in finance is the relationship between institutional investors'behavior and stock returns. In this thesis, we will study the relationship between institutional investors'holding/trading and stock returns.In this thesis, we first study the relationship between institutional investors'holding and stock returns in the same quarter. At the end of each quarter, all stocks are classified into 10 groups according to the percentage of institutional investors'holdings. We find that institutional investors'ownership is positive related to stock returns. Stocks with high institutional ownership outperform those with low institutional ownership. Then we study the relationship between institutional trading and stock returns. We find that institutional trading is highly related to stock returns. We also find stocks with higher institutional buying in the quarter outperform those with lower and negative institutional buying during the portfolio formation period. The relationship between institutional investors'trading and stock returns is stronger than the relationship between institutional investors'holding and stock returns.We want to find out whether institutional investors chase past returns or institutional investors'trading activities affect stock returns. In order to find out whether institutional investors chase past returns or institutional investors'trading activities affect stock returns, we perform standard Granger causality tests on institutional investors'trading and portfolios'returns to solve this problem. We found that there is strong evidence that institutional investors'trading is Granger-caused by stock returns, but stock returns are not Granger-caused by institutional trading. We also study institutional investors'trading patterns before and after institutional trading portfolio formation period. We found that in the portfolio formation quarter portfolio 1 experienced a huge increase in buying, with net purchases increasing from about -7% to about 16%. Conversely, there is a huge increase in selling for portfolio 10, with the percentage of negative purchase decreasing from 8% to about -15%.At last, we come up with two explanations to interpret the relationship between institutional trading and stock returns. One explanation is institutional herding; the other is stock price under reaction due to gradual information diffusion, making theoretical basis of this thesis more adequate.