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The Influence of Liquidity Constraints on Institutional Investors’ Investment Behavior

Author: YangZuoZuo
Tutor: GengZhiMin
School: Zhengzhou University
Course: Finance
Keywords: Institutional investors Liquidity constraints Investment behavior
CLC: F832.5
Type: Master's thesis
Year: 2012
Downloads: 43
Quote: 0
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Abstract


At present, the investment behavior of institutional investors in China are mostly based on the collective investment behavior of the principal-agent relationship, which determines the flow of funds of institutional investors are uncertainty, and it will make their own investment behavior subject to the liquidity constraints at capital level. In order to better respond to the demand of the capaital expenditure that may arise at any time, institutional investors will be more to the pursuit of short-term return on investment, and actively or passively change their original investment plans and strategies. The focus of this paper is how liquidity constraints affect the investment behavior of institutional investors, as well as the characteristics of the investment behavior of institutional investors based on the different markets.This paper first summed up the concept of different levels of liquidity, and then gives the definition of the liquidity constraints for institutional investors and analysis of the formation mechanism of the institutional investors of liquidity constraints. Subsequently, based on the perspective of behavioral finance, we discusses the influence of liquidity constraints for institution investors" investment behavior in three aspects. At the mean time, we analyze the characteristics of the institutional investors’ investment behavior in both bull and bear market conditions, drawing the following conclusion:In the bull market, institutional investors who based on the liquidity constraints will implement the reversal behavior to suppress the stock price, making it possible to conduct the next round of momentum behavior to push up the stock price and make a profit. They will repeat the process to perform band operations and adjust positions. Ultimately, the diaposition effect will be formed. In the bear market, institutional investors who based on the liquidity constraints will still constantly repeated the reversal behavior and momentum behavior to condect the band operation and adjust positions. At the same time, institutional investors will cooperate with each other, and they will also play the predatory trading considering the peer competition and performance ranking pressure. In addition, this paper elaborate the "predatory trading" practices between the institutional investors who based on the liqudity constraints by constructing a mathematical model, and use the empirical analysis method futher confirmed the conclusions of the theoretical part. Finally, this paper proposes some policy recommendations aimed at strengthening the supervision of institutional investors. improving the institutional investors’ liquidity risk manamement level, cultivating the comprehensive and rational institutional investors, and promoting the healthy development of our capital market.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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