Investors’ Trading Activity and Information Asymmetry: Evidence from the Romanian Stock Market

Cristiana Tudor

doi:10.3390/risks9080149

Abstract

This paper examines the problem of information asymmetry between foreign, local, institutional and individual investors on the Bucharest Stock Exchange (BVB) for the period 2004–2011. Using monthly returns for individual companies listed on BVB, stock market indices during the seven years period, as well as aggregate data on foreign and domestic investors (both institutional and individual) sales and purchases on the Romanian stock market, this research intends to provide an answer to the following question: Are foreign investors better informed than the domestic ones and continually achieve higher rates of return on the Romanian stock market? We compare the information advantage of the different investors’ categories by separating the stock in our data sample into two categories, namely blue-chips stocks (mostly stocks that are part of the BET index, and also containing one international stock, Erste Bank), and “regular” stocks. Subsequently, we study the explanatory power for stock returns of potential impact factors, which reflect the monthly net position of four groups of investors on the Romanian Stock market (Purchases-Sales) by employing multivariate regression models and a five variable VAR system. Ultimately, we are interested in whether investors in one particular category are consistently net buyers just before stock returns increase and are net sellers before stock returns decrease, thus suggesting they have an information advantage as compared to the domestic ones. Our aim is to provide robust empirical evidence on the nature of investors’ information asymmetry by utilising a unique data set and directly assessing relevant inter-relationships.

Highlights

Introduction and Related LiteratureEmerging and frontier equity markets, including post-communist Eastern European markets, have increasingly focused investors’ attention due to attractive returns and diversification benefits (Ajayi and Mehdian 1995; Bowman and Comer 2000)
We address the question of information asymmetry between local and foreign investors by investigating the relationship between foreign and local investors’ net buying position and future stock returns on the Bucharest Stock Exchange (BSE) on a data sample covering the period 2004 to 2011
Foreign investors have a significant presence on the Romanian stock market

Summary

Introduction

Emerging and frontier equity markets, including post-communist Eastern European markets, have increasingly focused investors’ attention due to attractive returns and diversification benefits (Ajayi and Mehdian 1995; Bowman and Comer 2000). These markets generally present lower liquidity and higher volatility than their mature counterparts (Peranginangin et al 2016). We address the question of whether foreign and/or institutional investors promote higher informational efficiency in narrow frontier markets To our knowledge, this investigation has not been done before for the Romanian stock market. This research adds to the existing literature by elucidating another aspect of market efficiency, i.e., the problem of information asymmetry and its association with superior returns, an aspect that is sensible for narrow capital markets such as those in the post-communist

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Conclusion