Empirical Research On The Impact Of The Institutional Investors On The Volatility Of The Stock Returns

At the beginning of the development of Chinese stock market, the individual investors, within all kinds of the investors, have played a leading role in the stock market at that time. However, because the individual investors lack of the ability of collecting a great deal of stock market information and the ability of analyzing and processing the information comprehensively, they are unlikely to make effective investment decisions rationally. On the contrary, they often make investment decisions with a strong speculative purpose. In order to obtain short-term gains, they always buy or sell the stocks frequently in the short time. This phenomenon makes the sentiment of the individual investors and the atmosphere of the stock market interact with each other, which leads to the fluctuation of the stock price disorderly, and also which causes the stock return to fluctuate fiercely. So at that time Chinese stock market is a highly volatile stock market and this kind of the stock market can’t provide a good environment for the investors to make a long-term investment.Thus, after learning the experience of how to stabilize the stock market in foreign countries, the police maker carries out a mature method that the institutional investors should be brought in to vary the structure of the investors in Chinese stock market. And this method has been a long strategy for stabilizing the stock market in Chinese stock market. The theoretical basis of this strategy is that most people are of the opinion that the institutional investors are the kind of the investors which are rational and professional. They usually have a professional management team and control abundant capital, which makes them have considerable advantages over the individual investors. If they take the advantages of abundant capital, advanced technique and useful information, they will make rational investment effectively. The investment decisions that the institutional investors make will also be transformed into a kind of stock market information, which can conduct other investors to make rational investment decisions. The police maker hope the development of the institutional investors can be able to play a stabilizing role in Chinese stock market and remain the volatility of the stock prices and stock returns at a stable level, which will create a good environment for the investors to invest stocks.However, the function of the institutional investors doesn’t work out, and what’s more it is in the opposite direction that makes the stock market highly volatile. When the development of the institutional investors is still in the immature period, the events that the institutional investors conduct market manipulation and insider trading always take place. Even nowadays when there are large numbers of laws and regulations that constraint the behavior of the institutional investors, it can’t avoid the institutional investors take risks to offend against the laws in order to seek the profit. On August16th,2013, the "Oolong Fingers" incident took place in EVERBRIGHT SECURITIES once again leads people to think whether the institutional investors play a role in stabilizing the stock market.With reference to the impact of the institutional investors on the volatility of stock returns, this paper makes the research according to the following process. Firstly, this paper summarizes the definition of the institutional investors, and introduces several major institutional investors and the history of the development of the institutional investors in China. Secondly, after reviewing some international and domestic references, this paper analyzes the theoretical impact of the institutional investors on the volatility of stock returns, and summarizes several factors that the institutional investors exacerbate or slow down the fluctuation of the stock return. Both positive and negative effects may exist. Thirdly, this paper engages in empirical research through both the macro and the micro perspectives. In macroeconomic analysis section, this paper uses the Shanghai A shares Index daily returns as sample. According to the ratio of the total net asset of the securities investment fund and the market value of AB shares, the sample interval is divided into three stages. Through the descriptive statistical analysis of the Shanghai A shares Index daily returns in the three stages, this paper finds out that in the stage that the ratio of the total net asset of the securities investment fund and the market value of AB shares is the largest, the standard deviation of the Shanghai A share Index daily returns is also the largest. Then this paper establishes GARCH (1,1) model on the Shanghai A shares Index daily returns, and obtains the conditional variance of the residuals in GARCH (1,1) model, which can be used for estimating the volatility of the daily returns. After comparing the conditional variance in the three stages, it comes to the same conclusion. In the microscopic analysis section, this paper use the institutional investors heavily holding shares as sample for the study, and then establishes two panel data regression models to analyze the relationship between the proportion of the institutional investors holding shares and the volatility of the stock returns, and the other relationship between the change of the proportion of the institutional investors holding shares and the volatility of the stock returns. Through the study, it finds out the relationship between the change of the proportion of the institutional investors holding shares and the volatility of the stock returns is unobvious. However, the relationship between the proportion of the institutional investors holding shares and the volatility of the stock returns is obvious, and when the proportion of the institutional investors holding shares grows, the volatility of the stock returns also grows. This outcome shows that the institutional investors exacerbate the volatility of the stock returns and the institutional investors don’t play a role in stabilizing the stock market. Finally, according to the existence of the issues, this paper makes some recommendations for the police maker and the institutional investors to put forward some relevant policy.