The Influence of Institutional Investors on the Volatility and Return of Chinese Stock Market

Abstract

This study investigated the effect of institutions' shareholding and holding period on the return and volatility of the shares in the Chinese stock market. 3267 stocks in the three boards of the Chinese stock market were chosen. Based on their data from the fourth quarter of 2018 to the third quarter of 2020, this paper researched the effect of the shareholding and holding period on the return and volatility mainly by the Fama-MacBeth regression method. Specifically, it scrolls to calculate the beta using time series data primarily and apply cross-section regression subsequently to perform statistical test. In addition to the population, we generated two-group subsamples depended on the shareholding and different boards, respectively, introduce lag variables to estimate their Inter-temporal impact. Besides, we also use Granger Causal Relation Test to avoid endogenous problem between institutions' shareholding and volatility. Additionally, different kinds of investment portfolios are constructed to derive the rules of institutional behaviors. According to the analysis, increasing institutional shareholdings exacerbated the fluctuations in stock price. Moreover, the institutional shareholding ratio has a significant positive effect on the stock yield. Meanwhile, there is a significant negative correlation between the duration of the holding and the volatility of the stock. A portfolio with higher institutional holding has a higher Sharpe ratio, while possesses a lower Sharpe ratio in a cross-time period. These results shed light for comprehensive understanding the behaviors of institutional investors in Chinese markets.