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The Changing Role of Foreign Investors in Tokyo Stock Price Formation

Author

Listed:
  • Kentaro Iwatsubo

    (Graduate School of Economics, Kobe University)

  • Clinton Watkins

    (Akita International University)

Abstract

Recent research suggests that foreign investors improve the informational efficiency of national stock markets. We examine how foreign investors contribute to efficiency. We model the influence of domestic and foreign investors’ trades on the efficient price of Japanese stocks over 39 years. Our results show that foreign investors trade at an information advantage over domestic investors, and this advantage has increased since around 2000. We find this is due to a substantial increase in the importance of global stock price and exchange rate information in stock price formation. Our results suggest that foreign investors have made more use of global information in trading Japanese equities as the influence of international financial factors on the domestic market has increased over recent decades.

Suggested Citation

  • Kentaro Iwatsubo & Clinton Watkins, 2021. "The Changing Role of Foreign Investors in Tokyo Stock Price Formation," Discussion Papers 2106, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:2106
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    Cited by:

    1. Chung, Chien-Ping & Chien, Cheng-Yi & Huang, Chia-Hsin & Lee, Hsiu-Chuan, 2021. "Foreign institutional ownership and the effectiveness of technical analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 86-96.
    2. Durand, Robert B. & Khuu, Joyce & Smales, Lee A., 2023. "Lost in translation. When sentiment metrics for one market are derived from two different languages," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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