Title: Impact of institutional investors on financial market stability: lessons from financial crisis

Authors: Jakša Krišto; Alen Stojanoviić; Anita Pavkoviić

Addresses: Department of Finance, Faculty of Economics and Business, University of Zagreb, Trg J.F. Kennedyja 6, 10000 Zagreb, Croatia ' Department of Finance, Faculty of Economics and Business, University of Zagreb, Trg J.F. Kennedyja 6, 10000 Zagreb, Croatia ' Department of Finance, Faculty of Economics and Business, University of Zagreb, Trg J.F. Kennedyja 6, 10000 Zagreb, Croatia

Abstract: Institutional investors are seen as key investors on the financial market, crucial market makers, supporting market liquidity and activity, as well as important pillars of pension systems and for maintaining financial stability. Institutional investors, mostly pension funds and insurance companies, were considered to have a positive effect on financial stability because of their long-term investment strategy and funding. The recent financial crisis and its impact on financial market stability revealed serious systemic risk and interconnections between movements on financial markets and institutional investors' investment behaviour. Their investment policy, outflows and fire sales on the financial market had a great impact on market stability and deepening of the financial crisis. The purpose of this paper is to analyse the impact of institutional investors on financial market stability in the aftermath of financial crisis. The research will point out lessons learned from the financial crisis and point at key international initiatives and necessary improvements in the field of regulation and conduct of business of institutional investors.

Keywords: institutional investors; financial market stability; financial crisis; regulatory changes; incentives framework; financial markets; investment behaviour; regulation; investment policy; outflows; fire sales.

DOI: 10.1504/IJDIPE.2014.060746

International Journal of Diplomacy and Economy, 2014 Vol.2 No.1/2, pp.102 - 117

Published online: 28 Apr 2014 *

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