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Bigger Fish in Small Pond: The Interaction between Foreigners’ Trading and Emerging Stock Market Returns under the Microscope

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  • Ülkü, Numan

    ()

  • Weber, Enzo

    ()

Abstract

This paper provides the first study of foreign investors’ trading in a sizeable European emerging stock market, using a combination of daily and monthly complete data collected at the destination. It also introduces the structural conditional correlation (SCC) methodology to identify the contemporaneous interaction between foreign flows and returns. We show that global emerging market returns are an additional driver of foreign flows after controlling for global developed market returns. Foreigners do negative (positive)-feedback-trade with respect to local returns at the monthly (daily) frequency. SCC methodology shows that the standard assumption in the literature that flows cause returns but not vice versa is not justified even at the daily frequency, making price impact estimates reported in previous literature questionable.

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File URL: http://epub.uni-regensburg.de/18951/1/UlkuWeber.pdf
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Paper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 451.

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Date of creation: 10 Jan 2011
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Handle: RePEc:bay:rdwiwi:18951

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Keywords: Foreign investors' trading in emerging stock markets; feedback trading; price impact; structural VAR; structural conditional correlation;

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  1. Kenneth A. Froot & Tarun Ramadorai, 2001. "The Information Content of International Portfolio Flows," NBER Working Papers 8472, National Bureau of Economic Research, Inc.
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