Heterogeneity of foreign investors and Knightian uncertainty: Evidence from the Chinese capital market

Abstract

Foreign investors are playing an increasingly important role in China's capital market, and the impact of northbound funds on Knightian uncertainty has attracted much academic attention. Based on the characteristics of northbound funds' trading behavior and investors' shareholding stability, this study divides them into long-term investors and short-term opportunists. It also examines the effect of long- and short-term foreign investors on individual stock Knightian uncertainty. The study finds that higher stability of northbound fund shareholding lowers the Knightian uncertainty of individual stocks, and long-term foreign institutional investors contribute to market stability. Furthermore, long-term investments in northbound funds can reduce Knightian uncertainty by improving the information environment, influencing the trading behavior of institutional investors, boosting investor confidence, and helping investors form consistent expectations. In conclusion, short-term foreign investors aggravate market volatility, whereas long-term foreign institutional investors help stabilize the market.