Institutional Investor Information Sharing, Stock Market Extreme Risk, and Financial Systemic Risk

• Main Authors: Xiao-Li Gong, Zhi-Qiang Du
• Format: Article
• Language: English
• Published: Hindawi-Wiley 2020-01-01
• Series: Complexity
• Online Access: http://dx.doi.org/10.1155/2020/5745916

To analyze whether information sharing in the institutional investors plays the role of a market stabilizer or risk booster, this paper constructs the institutional investor information network employing the common holding stocks of the mutual funds as links. The information linkages between two funds with large positions in the same stock are hypothesized to be connected to each other. Then, we use the information sharing efficiency in the fund networks to study the effects of information transmission on stock market extreme risk and financial systemic risk. Especially, the speed of information diffusion in the network is characterized by the topology structures based on social network theory. Empirical research studies find that the Chinese fund information network exhibits small-world characteristics, which reflects rapid speed of information diffusion. Seen from the idiosyncratic risk of volatility, information sharing of institutional investors can improve the behavior consistency of fund managers, thus increasing the stock volatility via herd effects. Besides, it can be concluded that institutional investor information sharing can reduce the extreme risk by promoting the comprehensiveness of information flow and the market pricing efficiency of stocks, thereby reducing the degree of financial systemic risk. The obtained conclusions provide suggestions for decision-making of institutional investors. It can help the regulators to pay attention to the herd effects so as to control systemic risk.