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Big Fish in Small Ponds: The Trading Behaviour and Price Impact of Foreign Investors in Asian Emerging Equity Markets

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Author Info
Anthony Richards

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Abstract

This paper analyses data for the aggregate daily trading of all foreign investors in six Asian emerging equity markets and provides two new findings. First, foreigners’ flows into several markets show positive-feedback trading with respect to global, as well as domestic, equity returns. In particular, foreigners tend to be buyers in these markets on the day after rises in these markets or in US markets. The nature of this trading suggests it is due to behavioural factors or foreigners extracting information from recent returns, rather than portfolio-rebalancing effects. Second, the price impacts associated with foreigners’ trading are much larger than earlier estimates. The results suggest that foreign investors and external conditions have a larger effect on emerging markets than implied by previous work.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2004-05.

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Date of creation: Jun 2004
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Handle: RePEc:rba:rbardp:rdp2004-05

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Related research
Keywords: equity markets; emerging markets; foreign investors; positive-feedback trading; price impacts;

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Bohn, Henning & Tesar, Linda L, 1996. "U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing?," American Economic Review, American Economic Association, vol. 86(2), pages 77-81, May. [Downloadable!] (restricted)
  4. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March. [Downloadable!] (restricted)
  5. John M. Griffin & Jeffrey H. Harris & Selim Topaloglu, 2003. "The Dynamics of Institutional and Individual Trading," Journal of Finance, American Finance Association, vol. 58(6), pages 2285-2320, December. [Downloadable!] (restricted)
  6. Karolyi, G. Andrew, 2002. "Did the Asian financial crisis scare foreign investors out of Japan?," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 411-442, September. [Downloadable!] (restricted)
  7. Brennan, Michael J & Cao, H Henry, 1997. " International Portfolio Investment Flows," Journal of Finance, American Finance Association, vol. 52(5), pages 1851-80, December. [Downloadable!] (restricted)
  8. Hyuk Choe & Bong-Chan Kho & Rene M. Stulz, 2004. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," NBER Working Papers 10502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. William N. Goetzmann & Massimo Massa, 2003. "Index Funds and Stock Market Growth," Journal of Business, University of Chicago Press, vol. 76(1), pages 1-28, January. [Downloadable!]
    Other versions:
  10. Choe, Hyuk & Kho, Bong-Chan & Stulz, Rene M., 2004. "Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea," Working Paper Series 2004-6, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  11. Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Noriyoshi Shirishi & Masahiro Watanabe, 2003. "Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows," NBER Working Papers 9470, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December. [Downloadable!] (restricted)
  13. Martin D. D. Evans & Richard K. Lyons, 2003. "How is Macro News Transmitted to Exchange Rates?," NBER Working Papers 9433, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Michael J. Brennan. and H. Henry Cao., 1997. "International Portfolio Investment Flows," Research Program in Finance Working Papers RPF-271, University of California at Berkeley. [Downloadable!]
  15. Froot, Kenneth A. & O'Connell, Paul G. J. & Seasholes, Mark S., 2001. "The portfolio flows of international investors," Journal of Financial Economics, Elsevier, vol. 59(2), pages 151-193, February. [Downloadable!] (restricted)
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  16. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
    Other versions:
  17. Aditya Kaul & Vikas Mehrotra & Randall Morck, 2000. "Demand Curves for Stocks "Do "Slope Down: New Evidence from an Index Weights Adjustment," Journal of Finance, American Finance Association, vol. 55(2), pages 893-912, 04. [Downloadable!] (restricted)
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  18. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July. [Downloadable!] (restricted)
  19. Bekaert, G. & Harvey, C. R. & Lumsdaine, R. L., 2002. "The dynamics of emerging market equity flows," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 295-350, June. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hali J. Edison & Francis E. Warnock, 2003. "Cross-Border Listings, Capital Controls, and U.S. Equity Flows to Emerging Markets," IMF Working Papers 03/236, International Monetary Fund. [Downloadable!]
  2. Jianxin Wang, 2007. "Foreign Ownership and Volatility Dynamics of Indonesian Stocks," Asia-Pacific Financial Markets, Springer, vol. 14(3), pages 201-210, September. [Downloadable!] (restricted)
  3. Hali J. Edison & Francis E. Warnock, 2006. "Cross-border Listings, Capital Controls, and Equity Flows To Emerging Markets," NBER Working Papers 12589, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Amita Batra, 2003. "The Dynamics of foreign portfolio inflows and equity returns in India," Indian Council for Research on International Economic Relations, New Delhi Working Papers 109, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  5. Kenneth A. Froot & Jessica D. Tjornhom, 2002. "Decomposing the Persistence of International Equity Flows," NBER Working Papers 9079, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Hau, Harald & Rey, Hélène, 2003. "Exchange Rates, Equity Prices and Capital Flows," CEPR Discussion Papers 3735, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Hali J. Edison & Francis E. Warnock, 2003. "Cross-board listings, capital controls, and equity flows to emerging markets," International Finance Discussion Papers 770, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2009. "Private information, stock markets, and exchange rates," BIS Working Papers 271, Bank for International Settlements. [Downloadable!]
  9. Bank for International Settlements, 2009. "Capital flows and emerging market economies," CGFS Papers, Bank for International Settlements, number 33, April. [Downloadable!]
  10. James P. F. Gordon & Poonam Gupta, 2003. "Portfolio Flows into India: Do Domestic Fundamentals Matter?," IMF Working Papers 03/20, International Monetary Fund. [Downloadable!]
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