Foreign Investors’ Trading Behavior in Response to Crises: Evidence from Thailand

Abstract

This paper examines the trading behavior of foreign investors in Thailand and its impact on the country’s stock market and currency value during January 1, 1975 to August 31, 2009. We also investigate if the trading strategy of foreigners has changed during the 1997 financial crisis, 2004 Tsunami crisis, and 2006 and 2008 political crisis. For the entire sample period, foreign investors were the net purchaser of Thai equity and implemented positive feed-back investment trading strategy, while domestic investors were the net sellers with a contrarian investment strategy. The trading behaviors of foreign investors do not change during the financial and tsunami turmoil and 2006 political upheaval in Thailand. These crises do not scare foreign investors out of Thailand. It was the trading activities of domestic individual investors that destabilized the stock market of Thailand during the 1997 Asian financial crisis. The trading activities of all investors cause a major destabilizing effect on Thai equity during the 2008 political crisis, particularly individual investors exert the strongest destabilizing effect. There is no evidence of price-destabilizing effect during the 2004 Tsunami crisis. The trading activities of domestic individual and institutional investors do not cause any destabilizing effect on Baht currency value caused by the trading activities of domestic individual and institutional investors were not found in any of the financial, tsunami, and political crises. Only did the trading activities of foreigners cause the baht to devalue during the 1997 Asian financial crisis.