The Role of Institutional Investors in Equity and Bond Markets

Abstract

This part of the chapter focuses on an important type of market participants in the modern capital markets - the institutional investors. We start with an overview of what is special about institutional investors and how they can contribute to economic development from a theoretical point of view. We then document their past and current investment behaviour in CEE equity and bond markets. Drawing on financial account data we show that foreign institutional investment - which is mainly portfolio investment - plays only a minor role in CEE market economies. Making use of an in-depth survey among western institutional investors we try to explain why portfolio investment in CEE countries is still relatively low. We report the criteria which guide the investment decisions of these portfolio investors. In a second step, drawing on the subjective opinions from the active market participants we single out the most important problems of the CEEC countries both in the economy as a whole and in the financial market that limit current and potentially future institutional investment.