The role of institutional investors and individual investors in financial markets: Evidence from closed‐end funds

Emily J. Huang

Review of Financial Economics, 2015, vol. 26, issue 1, 1-11

Abstract: I use closed‐end funds as a unique research tool to explore whether institutional investors are a stabilizing or a destabilizing force in financial markets. If institutional investors stabilize the market by trading against mispricing, then they should purchase closed‐end funds selling at a wide discount and sell funds selling at a large premium. Consistent with the market‐stabilizer hypothesis, I document that wide‐discount funds experience a higher subsequent institutional demand than premium funds do. Moreover, my findings that an increase in institutional ownership forecasts a decrease in the volatility of discount returns support the proposition that institutional trading reduces noise trader risk. In sum, the results suggest that institutional investors play a price‐stabilizing role in financial markets.

Date: 2015
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https://doi.org/10.1016/j.rfe.2015.05.001

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:26:y:2015:i:1:p:1-11

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