Do Institutional Trades Stabilize the Retail Investor Dominated Market?
نویسندگان
چکیده
Using a unique daily database, we investigate the short-run dynamic relation between institutional trades and stock price volatility in an individual investor dominated emerging market. We document a significant negative volatility-institutional trading relation in the emerging Chinese market. This negative relation is more pronounced for unexpected institutional imbalance and buy. Institutional trades stabilize the market at the lows and do not destabilize the market at the highs. Second, we find that institutional investors are prudent and more likely to invest in large and less risky stocks. Institutional investors herd in trading, but their herding behavior is largely limited to large stocks; and they do not systematically engage in feedback trading. Institutions also time volatility and trade less when volatility is high. Finally, institutional trading is persistent and more strongly related to lag institutional demand than lag returns. Overall, trading of the better-informed, prudential, and more rational institutional investors tends to stabilize stock prices in the retail investor dominated Chinese market. JEL classification: G1, G12, G23
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