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

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  • Huang, Emily J.

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.

Suggested Citation

  • Huang, Emily J., 2015. "The role of institutional investors and individual investors in financial markets: Evidence from closed-end funds," Review of Financial Economics, Elsevier, vol. 26(C), pages 1-11.
    • Handle: RePEc:eee:revfin:v:26:y:2015:i:c:p:1-11
    DOI: 10.1016/j.rfe.2015.05.001
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    More about this item

    Keywords

    Institutional investors; Individual investors; Closed-end funds; Noise trader risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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