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Foreign investor trading, local investor mimicry and stock price volatility

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  • Zheng, Xingxin
  • Gao, Yuanyuwei
  • Li, Haitong
  • Zhao, Xiangyang

Abstract

The impact of foreign investor trading on financial market stability in host economies has emerged as a critical issue in international finance. This paper examines the relationship between foreign investor trading and stock price volatility within the unique institutional setting of China’s Stock Connect program, a landmark initiative in cross-border market integration. Leveraging high-frequency daily transaction data, we provide robust empirical evidence on the effects and transmission mechanisms of foreign trading. Our findings reveal that foreign investor trading significantly amplifies future stock price volatility. We also identify the local investor mimicry effect as a key mechanism: foreign investor trading serves as an informational signal, prompting local (retail) investors to replicate their strategies, which exacerbates order imbalances and trading intensity, thereby amplifying stock price fluctuations. Heterogeneity analysis further demonstrates that this mimicry effect is particularly pronounced among firms with lower information transparency, where local investors rely more heavily on foreign trading signals. To address endogeneity concerns, we conduct robustness checks incorporating exogenous interruptions in foreign trading activities, which further corroborate our main results. This study contributes to the literature on capital market liberalization and stock market volatility by offering novel insights into the behavioral spillover effects of foreign trading in emerging markets.

Suggested Citation

  • Zheng, Xingxin & Gao, Yuanyuwei & Li, Haitong & Zhao, Xiangyang, 2025. "Foreign investor trading, local investor mimicry and stock price volatility," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25002124
    DOI: 10.1016/j.pacfin.2025.102875
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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