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Do Foreign Investors Destabilize Stock Markets? The Korean Experience in 1997

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  • Hyuk Choe
  • Bong-Chan Kho
  • Rene M. Stulz

Abstract

This paper examines the impact of foreign investors on stock returns in Korea from November 30, 1996, to the end of 1997 using trade data. We find strong evidence of positive feedback trading and herding by foreign investors before the period of Korea's economic crisis during the last three months of 1997. The evidence of herding becomes weaker during the crisis period and positive feedback trading by foreign investors disappears. We find no evidence that trades by foreign investors had a destabilizing effect on Korea's stock market over our sample period. In particular, the market adjusted quickly and efficiently to large sales by foreign investors and these sales were not followed by negative abnormal returns amplifying their impact.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6661.

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Date of creation: Jul 1998
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Publication status: published as Journal of Financial Economics, Vol. 54, no. 2 (October 1999): 227-264.
Handle: RePEc:nbr:nberwo:6661

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  1. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
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  17. John Clark & Elizabeth Berko, 1996. "Foreign investment fluctuations and emerging market stock returns: the case of Mexico," Research Paper 9635, Federal Reserve Bank of New York.
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