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Do Foreign Investors Cause Noise in an Emerging Stock Market?

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  • Doowoo Nam

    (Department of Finance, Box 5076, The University of Southern Mississippi, Harriesburg, MS 39406 USA.)

Abstract

The problematic point of the noise trader model is the difficulty of measuring noise and testing theories based on noise trading. We investigate the relationship between the trading volume and the stock returns, using the Granger-causality type of methodology, as a means of testing the noise trader model. Taking four variables into consideration-three variables ofbuying, selling and netpurchases by foreign investors for the trading volume, and one variable of returns on an index for the stock returns-we examine whether foreign investors have played roles as noise traders in the Korean stock market during the recent financial turmoil, and conclude that they have transacted informed trading. The conclusion is sharply contrasted with some criticism that foreign investors, acting like noise traders, caused the stock market crash, which exacerbated the financial crisis of Korea.

Suggested Citation

  • Doowoo Nam, 2004. "Do Foreign Investors Cause Noise in an Emerging Stock Market?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(1), pages 21-36, January.
    • Handle: RePEc:sae:emffin:v:3:y:2004:i:1:p:21-36
    DOI: 10.1177/097265270400300102
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    References listed on IDEAS

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    1. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    2. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    3. John Y. Campbell & Albert S. Kyle, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 1-34.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    5. Sellin, Peter, 1996. " Inviting Excess Volatility? Opening Up a Small Stock Market to International Investors," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 603-612, December.
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    Cited by:

    1. Isabelle Aranditha Gusdinar & Deddy Priatmodjo Koesrindartoto, 2014. "Institutional Investors Trading Strategy in Indonesia’s Government Bond Market During the 2008 Crisis," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(1), pages 21-44.

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