The Moderating Role of Foreign Institutional Investors on Stock Market Volatility: Evidence from China

ABSTRACT

Foreign shareholding can result in stock market volatility, especially in immature financial markets. With quarterly data from 1,348 listed companies held by Qualified Foreign Institutional Investors (QFIIs) from 2006 (Q1) to 2020 (Q4), we investigate the dynamic time-varying impact of QFII ownership on China A-share market volatility using an online support vector quantile regression. Our results indicate that QFIIs have an unsystematically destabilizing effect. This effect is asymmetric under different market conditions. QFIIs demonstrate more procyclicality during normal times, and less procyclicality during times of financial stress. The results of network density analysis confirm that volatility risk will stabilize as risk spill-over will decrease when QFIIs gradually expand their shareholdings and strengthen their interconnections in the China A-share market.

KEYWORDS:

• Qualified foreign institutional investors (QFIIs)
• online support vector quantile regression (online SVQR)
• market volatility
• dynamic impact

JEL:

• G11
• G15
• G18
• G23
• G28

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1. GEM and SME Board refer to the Growth enterprise market and Small and Medium Enterprise Board respectively.

2. The definition of the variables is in Table 1.

Additional information

Funding

We acknowledge the grant from National Social Science Foundation of China [21BJY256], Natural Science Foundation of Zhejiang Province, China [LY20G030023], and National Natural Science Foundation of China [12101552].