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

Abstract

Daily data for foreign investors' trading in six Asian emerging equity markets provide two new findings. First, foreigners' flows into several markets show positive-feedback trading with respect to global, as well as domestic, equity returns. The nature of this trading suggests it is due to behavioural factors or foreigners extracting information from recent returns, rather than portfoliorebalancing effects. Second, the price impacts associated with foreigners' trading are much larger than earlier estimates, and would be consistent with permanent price pressures from demand shocks. The results suggest that foreign investors and external conditions have a larger impact on emerging markets than implied by previous work.