Mutual Funds in India - Trading Volume

The Role of Institutional Traders around Section Switches on the Tokyo Stock Exchange

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s021909159800017x ◽

1998 ◽

Vol 01 (02) ◽

pp. 233-251

Author(s):

Asjeet S. Lamba ◽

Mohamed Ariff

Keyword(s):

Mutual Funds ◽

Trading Volume ◽

Stock Exchange ◽

Abnormal Returns ◽

Trading Strategies ◽

Trading Behavior ◽

Buying Behavior ◽

Market Participants ◽

Major Market ◽

Tokyo Stock Exchange

In this paper we analyze the trading behavior of major market participants around switches from section 2 to section 1 of the Tokyo Stock Exchange (TSE). Previous research has shown that firms switching to section 1 earn significant positive abnormal returns around the switch date. It has been argued that the abnormal returns earned by these firms are driven by the trading strategies of a few large mutual funds that dominate trading on the TSE. If these large mutual funds have prior information about impending switches, and are exploiting this information, their trading strategies would be more obvious in periods when a large number of firms switch to section 1. Based on the observation that a much larger proportion of firms switch to section 1 in September than in other months, we examine the pricing and trading volume behavior of firms switching to section 1 in September and other months during the years 1984–1992. We find significantly higher abnormal returns for firms switching in September than in other months. Also, firms switching in September experience a significant and persistent increase in excess trading volume compared with firms switching in other months. Taken in conjunction with the abnormal return results, this evidence is consistent with a persistent buying behavior on the part of large mutual funds prior to an impending switch to section 1.

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