Institutional Investors' Trading in Speculation: Evidence from China

Gaowen Kong and Dongmin Kong

South African Journal of Economics, 2015, vol. 83, issue 4, 617-631

Abstract: The trading behaviour of institutional investors has attracted much attention. However, many issues related to their trading behaviour cannot be addressed without high-frequency changes in institutional ownership. Based on a measure of the trading behaviour of institutional investors by using an institutional account dataset from China, we find that (i) active institutions trade speculatively by taking advantage of individual investors; (ii) individuals buying high and selling low offer liquidity only on average; (iii) foreign investors do not show significant patterns in speculation; and (iv) trading of active institutions significantly affects price. This study casts doubt on the conventional wisdom that institutional or sophisticated investors improve market efficiency by correcting mispricing, and provides direct evidence for institutional investors' speculation behaviour and their destabilising effect on the stock market. Results suggest that regulators in emerging markets should monitor institutions' speculation to bring fairness and justice to the stock market.

Date: 2015
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