The Trading Dynamics of Institutional Investors

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The fraction of corporate equity owned by institutional investors has grown considerably in the past several decades; institutional holding of shares in U.S. equities has increased from approximately 16% in 1965 to over 50% in 2010 (Federal Reserve Board, 2011). The fact that institutional investors are managing such a sizable wealth invested in U.S. equity market has potential important role in term of setting market prices. The growing impact of institutional investors on capital markets has induced to increased research on the behavior of this group of investors both by academics and policy makers, who tend to believe that institutional investor follow momentum based strategies, and often are alleged to herdinglike behavior and following destabilizing trading strategies.

Recent studies investigating the behavior of institutional investors document three main results. First, institutional investors are momentum traders (buying past winners and selling past losers) and are more likely to follow past prices (\citet*{grinblatt1995momentum}). Second, Institutional investors sometimes trade in the same direction over a period of time or engage in herding behavior (\citet{wermers1999mutual}). Finally, the contemporaneous association between changes in quarterly institutional holding and quarterly stock returns is much stronger than the feedback trading effect (\citet{nofsinger1999herding,wermers1999mutual}).

The previous studies on the behavior of institutional investors
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