Assessment of international equity investment connectedness : portfolio diversification with respect to institutional and non-institutional investors

Abstract

International equity flows increased approximately five times from 2001 to 2016. Therefore, stock market connectedness is increasing over time. It is necessary to assess international equity investment structure not only in general but also by disaggregating it by the type of investor as institutional and non-institutional investors have different characteristics and are important participants in financial markets. This thesis concentrates on international equity investment connectedness during growth and crisis periods with regard to institutional and non-institutional networks. Its structure is divided into three parts. The first part is dedicated to the literature review on differences between institutional and non-institutional investors, determinants of equity flows, methodologies used to assess stock market connectedness and contagion, its channels, structure of international equity investment network and its relevant measures. The second part covers the relevance, aim, logic of the research, steps, chosen evaluation methods, formulation of the research hypotheses and discussion of research limitations. The third part is devoted to the discussion of the results obtained analysing international equity investment connectedness with respect to institutional and non-institutional investors during growth and crisis periods. It is found that institutional and non-institutional investors have different portfolio diversification practices. Institutional investors accounting for majority of equity flows form denser, more clustered, hierarchical and connected network. These differences persist even during crisis although both network are affected negatively. Even if there are significant differences between institutional and non-institutional networks during crisis, it does not induce relevant changes in the structure of both networks. In addition, non-institutional investors are less vulnerable to financial crisis. However, both types of investors react negatively to increased stock market volatility during growth period. Besides stock market volatility, institutional investors, especially from central countries, diversify their portfolios in more countries when exchange rate volatility increases during growth period and contracts during crisis. Non-institutional investors, instead, do not consider exchange rate volatility as a significant risk factor. Finally, both types of investors invest more in countries with higher debt to GDP during growth period but withdraw their investments during crisis. This factor is the most relevant to non-institutional investors