Content area
Full text
I. Foreword
As a result of policy orientation of "developing institutional investors in a supernormal way", the number of institutional investors has risen sharply in China. But, practices of the securities market is opposition to what is expected, institutional investors have failed to stabilize the market and behavior characteristics of some institutional investors have undergone serious variation and deformation. If so, then what on earth is the role of institutional investors in the securities market where "herd behavior" and "positive feedback strategy" are common, to make arbitrage - move price to fundamental value and stabilize the market, or to magnify positive feedback trading and non-stabilize the market? This has been a hot issue attracting attention from both management and academia.
Studies on this issue have come to quite differing results. Some scholars, represented by [12] Sosin (1998), believe that rational institutional investors can find a timely irrational price in the market and take the opposite strategy to correct the mistaken price, which helps decrease fluctuations in the securities market. But the empirical studies ([5] Dennis and Strickland, 2002) on mutual fund suggest that, due to the restriction of performance evaluation, institutional investors widely engage in herd behaviors and momentum trading, and these irrational behaviors add to market fluctuations.
Besides, there are many literatures that study institutional behaviors and market stabilization from the angle of positive feedback trading. [13] Shleifer (2000) introduced a rational arbitrageur into the model used to study positive feedback trading, and consequently has discovered greater fluctuations in stock price. Some empirical studies also have found strong evidences to show that institutional investors who have taken positive feedback trading strategies cause greater market fluctuations ([2] Bennett et al. , 2003; [10] Sias, 2007). There are also scholars who hold the opposite opinions, like [7] Gibson and Safieddine (2003) and [1] Badrinath and Wahal (2002) who believe that, when positive feedback effect causes price to deviate from its fundamental value, institutional investors as rational arbitrageurs will take negative feedback strategies to correct such deviation, and as a result, positive feedback traders cannot benefit from trading and will eventually vanish from the market. [9] Lakonishok et al. (1992) has thought that institutional investors also have the possibility to take actively positive feedback trading strategies...