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An Empirical Study on the Relationship between Institutional Holdings and Stock Price Volatility-Based on the Endogenous Perspective

Author ZhouQingPing
Tutor ZhaoLingZuo
School Ocean University of China
Course Financial
Keywords institutional investor stock holding proportion stockprice volatility endogenous
Type Master's thesis
Year 2013
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The establishment of Shanghai Security Exchange on December19th,1990and Shenzhen Security Exchange on July10th,1991marked the formation of China’s standard stock market. During the early stage of the development of stock market, most participants are individual investors. Due to the lack of experience and expertise, the investment behavior of individual investors showed an obvious character of speculation. As a result, transactions like gambling are common to be seen in the market. These behaviors of the individual investors incurred a chaotic turbulence of the stock market, making the development of stock market’s preliminary stage very unstable.Compared with individual investors, institutional investors are commonly to be seen as the investors who have a more effective information channel and more professional analytical ability. So their investment behavior should be more rational and they may stabilize the stock market. Based on this theory, China’s Securities Regulatory Commission put forward a project called "Transnormal development of institutional investors" in2000, which draw lessons from those mature capital market of foreign countries, aiming to improve the institutions of capital market and stabilize the stock market. However, as relevant laws and regulations are incomplete and the control system is imperfect at the early stage of the development of institutional investors, the practice of illegal operations prevailed. Examples like shady deal of fund and main force of institutions control stock price are common to be seen. Under this circumstance, institutional aggravated the volatility of the stock market rather than stabilizing it. Through many years’ development and regulation, institutional investors have gradually become one of the most important investing entity in the market. Under this new situation, re-recognize the stabilization effect which institutional investors impose on the stock market is of great importance. Though studies on whether institutional investors could stabilize stock market are not rare to find at this moment, few researchers have come to the same conclusion, neither theoretically nor empirically. So these years, studies on the influence on stock market imposed by institutional investors has become a focus during academic circle.On the basis of referring to a large amount of studies and learning relevant theories and methods, this article firstly theoretically analyzed how institutional investors’ stock holdings influence the turbulence of stock market. Then, this article broadly searched relevant data from capital market in our country, selecting target stocks from constituent stock of Shanghai50Index. At the same time, choosing the data of target stocks between2006and2012, which include institutional investors’ stock holdings proportion, market volatility, earnings per share, A-stock value in circulation, this article carry out an empirical study of the relationship between institutional investors and stock market volatility. During the process of empirical analysis, this article take the endogenous relationship between institutional investors’ stock holdings and stock price volatility, using2SLS method to eliminate the influence of endogenous relationship, aiming to acquire a more object and accurate conclusion. Besides, in order to eliminate periodical factors, this article respectively took empirical study on bull market and bear market. At last, according to the result from empirical study, this article analyzed the issues existing in the institutional investors in our country, and put forward few corresponding policies and suggestions about their future development.

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