Abstract
We investigate the trading behavior of foreign investors, and how it is related to stock prices under different market conditions in Taiwan. Specifically, we focus on two surrogates of market conditions: stock market turnover and return. Applying Hansen and Seo’s (2002) threshold cointegration model to avoid arbitrarily chosen cutoff values for market conditions, we find that foreign investors facilitate the price discovery function when the market is hot (e.g., high stock market turnover and/or high market return). In contrast, they become market followers when the market is cold (e.g., low stock market turnover and/or low market return).
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