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The Contribution Of Foreign Investors To Price Discovery In The Indonesian Stock Exchange

Listed author(s):
  • JOSEPHINE SUDIMAN

    ()

    (Polytechnics State of Padang, Kampus Limau Manis, Padang, Sumatera Barat, West Sumatra 25000, Indonesia)

  • DAVID EDMUND ALLEN

    ()

    (Centre for Applied Financial Studies, University of South Australia, GPO Box 2471, Adelaide South Australia 5001, Australia; School of Mathematics and Statistics, The University of Sydney, New South Wales 2006, Australia)

  • ROBERT JOHN POWELL

    ()

    (School of Accounting, Finance and Economics, Edith Cowan University Australia, 270 Joondalup Drive, Joondalup, 6027 Western Australia, Australia)

This article examines the contribution of foreign investors to price discovery by applying a vector error correction model (VECM) to 30 frequently-traded stocks on the Indonesia Stock Exchange. We use the Lee and Ready (1991) rule to determine the initiator of a trade and compute the volume weighted average price (VWAP) for every 30 min interval during the period 2004–2006. There are three key findings. First, foreign investors are more aggressive than local investors in placing their orders yet foreigners do not trade as often as locals. Second, the profits of foreign investors are smaller than local investors. Third, foreign investors need to adjust their trade price at a higher magnitude to achieve price equilibrium, which indicates that the majority of price discovery occurs among local investors in the Indonesian market.

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File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010495213500085
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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Annals of Financial Economics (AFE).

Volume (Year): 08 (2013)
Issue (Month): 02 ()
Pages: 1-24

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Handle: RePEc:wsi:afexxx:v:08:y:2013:i:02:n:s2010495213500085
DOI: 10.1142/S2010495213500085
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