A Study Of The Impact Of Institutional Investors’ Position Building Behavior On Alpha Coefficient’s Estimate Of CAPM Model

CAPM model is the foundation of modern financial theory，The key index of themodel—the Alpha coefficient is called as characteristic yield or exceeding yield of thesecurity. It has a wide range of application in the field of academic research andsecurity practice. The Alpha coefficient has time-varying and mean regression’scharacteristics in the empirical research. The method to estimate the key index of theCAPM model is the Security Characteristic Line method, the Alpha coefficient is theintercept of the regression line. With the development of economy, institutionalinvestors which are represented by all types of investment funds have become themain participants in the securities market, their trading behavior has a very importantimpact on the securities market. Institutional investors often use position buildingbehavior in the stock exchange process, the influence of such trading behavior on thesecurities market has become a hotspot of the financial sector’s academicresearch.This paper will research the impact of institutional investors’ positionbuilding behavior on CAPM model’s key index—the Alpha coefficient’s estimate.Inaddition,we will also measure the direction and extent of its impact. Institutionalinvestors’ position building behavior refers to institutional investors gradually increaseits holding in the company in order not to push up the share price in the transactionprocess. They will split the large trading positions and make batchedtransactions.These batched transactions often use medium position, because itinvolves the equilibrium of the two kinds of transaction costs in the position buildingprocess. Generally speaking, Institutional investors will produce two counter-balancetransaction costs in the stock exchange process. One is the explicit cost which is basedon trading commissions, it is negatively correlated with the size of trading positions.The other is the hidden cost which is based on price impact caused by stock exchange,it is positively correlated with the size of trading positions. This paper buildsinstitutional Investors’ transaction cost model of position building by learning fromInventory EOQ Modell of financial management, the use of mathematical derivationgets the position which minimizes total transaction costs of Institutional investors, that is medium position. This proves that it is reasonable to build position for institutionalinvestors.Since it is reasonable to build position, Institutional investors will maketheir market forces to gradually release by progressively overweighting orunderweighting stocks, it will significantly alter the shape of the SecurityCharacteristic, thereby may change the value of Alpha coefficient. Then this paperhypothesize: institutional investors’ position building behavior can affect the SecurityCharacteristic Line’s regression intercept—the Alpha coefficient, and their positionbuilding’s degree is direct proportional to the Alpha coefficient. Then this paper makean empirical test to the hypothesis, and find the widely existence of institutionalinvestors’ position building behavior, it can affect the Security Characteristic Line’sregression intercept—the Alpha coefficient, and the position building’s degree ofinstitutional investors is direct proportional to the Alpha coefficient by empiricalresearch. This paper is divided into six chapters to elaborate: the first chapter is anintroduction, the second chapter is a review of the literature, the third chapter isinstitutional investors’ position building behavior, the fourth chapter is a theory ofCAPM model and Alpha coefficient, the fifth chapter is a empirical research of theimpact of position building behavior on the Alpha coefficient’s estimate, the sixthchapter is the empirical research’s results, the seventh chapter is the researchconclusion and analysis.