The Qualified Foreign Institutional Investor (qfii) Scheme & Its Impact on China Stock Volatility

The Qualified Foreign Institutional Investor (QFII) Scheme

&

Its Impact on China Stock Volatility

Group 11

He Yingcheng, Kong Lingshu and Wang Jixin

Faculty of Business and Economics

The University of Hong Kong

May 5, 2017

Abstract

The main purpose of this paper is to explore the impact of Qualified Foreign Institutional Investor (QFII) Scheme on the volatility of stocks in the Chinese market. We first analyze QFII Scheme and the characteristics of various investors to demonstrate our motivation and reflection on the research question, and our hypothesis is that QFII Scheme reduces the volatility of stocks in the Chinese market. Then we introduce our two multi-linear regression models to evaluate the impact on both qualitative and quantitative stages. These models apply the logarithmic transformation to fit nonlinear relationship, and incorporate control variables on firm-specific attributes, macro-economic environment and industry fundamentals to eliminate disturbances. The two regression results, however, both imply a significant positive relation between QFII investment and stock volatility. We thus discuss the possible reasons behind and provide implications of this unexpected result on four key stakeholders. Finally, we suggest several limitations on our research and inspiration for further research.

Keywords: QFII Scheme, stock volatility, positive correlation

Catalog

1. Introduction        3

1.1 QFII Scheme        3

1.1.1 Basic Profile of the Policy        3

1.1.2 Current Development of the Policy        4

1.2 Research Question and Hypothesis        5

1.3 Underlying Motivation        5

1.3.1 The China Stock Market        5

1.3.2 Institutional Investors        6

1.3.3 Qualified Foreign Institutional Investors (QFIIs)        7

1.4 Literature Review        8

2. Methodology        8

2.1 Framework Overview        8

2.2 Model and Variables        9

2.2.1 Regression Models        10

2.2.2 Dependent variable        11

2.2.3 Explanatory variables        11

2.2.4 Control variables        11

2.3 Data Collection and Processing        14

3. Results and Interpretation        15

3.1 Regression Results: Models and Explanatory Variables        15

3.2 Control Variables        17

3.3 Possible Reasons Behind Our Results        18

4. Implications        19

4.1 Regulatory Authority        19

4.2 QFIIs        20

4.3 Retail Investors        20