The Impact of Institutional Ownership on Idiosyncratic Volatility: A study of Swedish companies listed on the OMX 2004-2007

Abstract: How does idiosyncratic volatility relate to the proportion of institutional ownership in a company? This thesis investigates the question by running cross-sectional regressions, using panel data on Swedish firms included in OMX Mid Cap and Large Cap between the years 2004 and 2007. We start by constructing a measure of idiosyncratic volatility. This is done by estimating systematic and idiosyncratic components of stock return in a CAPM regression, inspired by Campbell et al. (2001). We then regress idiosyncratic volatility on the proportion of institutional ownership, while controlling for the size and the solidity of each company. Our findings suggest that there is a signicantly positive relationship between institutional ownership and the idiosyncratic volatility of the stock-return. These findings are in line with the findings of previous studies, e.g. Malkiel & Xu (2003).