GLOBAL – Institutional investors could have a role in market efficiency and stability, says the Bank for International Settlements.

The BIS’s Ingo Fender, writing in the BIS Quarterly, noted that market efficiency “requires the existence of investors with enough capital and sufficiently long investment horizons to maintain a given position until all available information is fully incorporated into prices”.

“Institutional investors, owing to their size and potentially long investment horizons, could be well placed to play this role.

“Their existence favours, in principle, a faster, more comprehensive and thorough investment process, ranging from improved information-gathering and analysis to more consistent decision-making.”

“Assuming they invest on the basis of fundamentals and provided they have the ability to maintain their positions long enough, arbitrage by large institutional investors could stabilise asset prices by making sure that prices do not substantially deviate from fundamentals.

“For much the same reasons, institutional investors would be expected to serve as structural providers of market liquidity, particularly in times of stress.”

However, Fender acknowledges that there is “no clear-cut empirical support” for this hypothesis.

The comments follow on from a report on institutional asset management published by the BIS’s Committee on the Global Financial System in March.