The role of institutional investors in market volatility during the subprime mortgage crisis

Abstract

In this study, we obtain intraday data on the Taiwan Stock Exchange Capitalization Weighted Stock Index and apply the range-based estimation method to measure intraday high–low prices, whilst also incorporating the variable of net trading volume of institutional investors into the heterogeneous autoregressive model of realized volatility (RV). Our findings demonstrate that the trading behaviour of institutional investors does have a significant impact on future RV whilst also suggesting that institutional investors play a stabilizing role in the Taiwan stock market. The empirical results also show that institutional investors’ net selling caused more volatility in the Taiwan stock market during the subprime mortgage crisis in the United States in 2007, indicating that institutional investors tend to sell more actively than individuals when the market drops sharply. We also demonstrate that the modified model enhances volatility forecasting performance, thereby indicating that the modified model has more a...