The Institutional Footprint : An empirical study of the relationship between institutional ownership and idiosyncratic volatility in Scandinavian stock markets

Abstract

This thesis investigates the impact of institutional ownership on idiosyncratic volatility in Scandinavian stocks. The study applies CAPM regression analysis to estimate idiosyncratic volatility, akin to Xu and Malkiel (2003). Utilizing a comprehensive dataset on institutional ownership, the investigation is conducted by running fixed effects panel regressions on Scandinavian stocks, more specifically stocks listed on the Copenhagen, Helsinki, Oslo, and Stockholm exchanges, from 2017 to 2022. We regress idiosyncratic volatility on institutional ownership lagged by one quarter, controlling for variables such as company size, leverage, and stock turnover. Our findings suggest that there is a statistically significant and positive relationship between institutional ownership and idiosyncratic volatility. These insights challenge traditional portfolio theory and have significant implications for investors and market regulators. For investors, our findings suggest a need to reconsider diversification strategies in light of changing market dynamics. For regulators, proactive monitoring and policy adaptation to counter the destabilizing nature of institutional ownership is essential for maintaining market stability. The research conducted adds to the understanding of the dynamics between institutional ownership and idiosyncratic volatility in Scandinavia.