Essays on Institutional Trading Around the World

Abstract

This dissertation consists of two essays on institutional trading around the world. The first essay (Chapter 1) investigates the trading behavior of institutional investors from 28 countries around the world. During the period from 1999 to 2008, we find strong empirical evidence that institutional investors tend to move their funds out of volatile foreign equity markets and back to their home markets, particularly following the recent 2007-2008 global financial crisis. Our results also show that institutional investors prefer to hold more liquid stocks in highly volatile markets, suggesting evidence of flight to liquidity. Institutional investors are also inclined to increase the level of liquidity of their home portfolios relative to that of their foreign portfolios when there is a surge in foreign market volatility. Finally, evidence supports that the overall portfolio risk of institutional investors reduces during the financial crisis period. The second essay (Chapter 2) studies the impact of market sentiment on institutional home bias around the world. The paper explores the effects of three investor sentiment measures on institutional home bias from 1999 to 2009 for 14 institutional domiciled countries based on Factset Lionshares and Worldscope data. WE show a negative significant impact of global investor sentiment on institutional home bias. We provide the empirical evidence that global investor sentiment index reduces the institutional home bias in the international market during the past decase. Local and total market sentiment do not show the statistically significant effects on home bias. Distance and language have positive and negative effects on institutional home bias, respectively. Investor protection variables such as rule of law index and risk of expropriation index have a significant positive effect and negative effect on institutional over-weighted investment on domestic market. Our findings are robust for the sample either including or excluding the U.S. market.