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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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  • Anthony Richards

    (Reserve Bank of Australia)

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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Bibliographic Info

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

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References

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  1. Gaston Gelos & Eduardo Borensztein, 2000. "A Panic-Prone Pack? the Behavior of Emerging Market Mutual Funds," IMF Working Papers 00/198, International Monetary Fund.
  2. 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.
  3. Massimo Massa & William N. Goetzmann, 1999. "Index Funds and Stock Market Growth," Yale School of Management Working Papers ysm23, Yale School of Management.
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  13. Dahlquist, Magnus & Robertsson, Goran, 2004. "A note on foreigners' trading and price effects across firms," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 615-632, March.
  14. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc.
  15. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  16. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
  17. 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.
  18. 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.
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