Do Long-Term Institutional Investors Contribute to Financial Stability? – Evidence from Equity Investment in Hong Kong and International Markets

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 22/2018

Journal of International Financial Markets, Institutions & Money, Vol.77: 101521 (2022)

36 Pages Posted: 10 Oct 2018 Last revised: 12 Aug 2022

Date Written: September 17, 2018

Abstract

This working paper was written by Tom Fong (Hong Kong Monetary Authority), Angela Sze (Hong Kong Monetary Authority) and Edmund Ho (Hong Kong Monetary Authority).

This paper assesses whether long-term institutional investors help stabilise or destabilise Hong Kong and international stock markets. We use a novel dataset based on individual funds issued by insurance companies and pension funds worldwide. This allows us to examine each economic region in conjunction with the remaining regions, not in isolation as in bilateral flow-based analysis. Overall, our results indicate that these institutional investors would be counter-cyclical (i.e., they buy past losers and sell past winners) for most stock markets (including Hong Kong) during normal market conditions, which could temper upward and downward movements in asset prices. During adverse market conditions, these investors would become procyclical for some stock markets in advanced economies, which could exacerbate price volatility. This implies that these long-term institutions would have a destabilising impact on these markets during the market downturns. The pro-cyclicality may reflect that some AEs were the epicentre of several major stock market crashes during the sample period. Moreover, the influence of pro-cyclicality would be reinforced by the LTIIs’ herding behaviour.

Keywords: long-term investment, institutional investors, insurance companies, pension funds, portfolio rebalancing, pro-cyclicality, financial stability, panel data, time series analysis

JEL Classification: C22, C23, G01, G11, G15, G23

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Do Long-Term Institutional Investors Contribute to Financial Stability? – Evidence from Equity Investment in Hong Kong and International Markets (September 17, 2018). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 22/2018, Journal of International Financial Markets, Institutions & Money, Vol.77: 101521 (2022), Available at SSRN: https://ssrn.com/abstract=3250615 or http://dx.doi.org/10.2139/ssrn.3250615

Hong Kong Institute for Monetary and Financial Research (Contact Author)

(HKIMR) ( email )

Units 1005-1011, 10th Floor, One Pacific Place
88 Queensway
Hong Kong
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
86
Abstract Views
655
Rank
527,956
PlumX Metrics