Institutional Investors and Stock Returns Volatility: Empirical Evidence from a Natural Experiment
17 Pages Posted: 17 Feb 2005
Date Written: February 15, 2005
In this paper, we provide empirical evidence on the impact of institutional investors on stock market returns dynamics. The Polish pension system reform in 1999 and the associated increase in institutional ownership due to the investment activities of pension funds are used as a unique institutional characteristic. Performing a Markov-switching-GARCH analysis we find empirical evidence that the increase of institutional ownership has temporarily changed the volatility structure of aggregate stock returns. However, the findings do not support the hypothesis that institutional investors have destabilized stock prices. The results are interpretable in favor of a stabilizing effect on index stock returns induced by institutional investors.
Keywords: Institutional traders, Polish stock market, pension fund investors, stock market volatility, Markov-switching-GARCH model
JEL Classification: C32, G14, G23
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