Domestic Individual Investors Research Articles

예상치 못한 외국인 순매도로 인한 비대칭적 변동성

This paper investigates whether the unexpected net selling by foreign investors is regarded as a bad news for domestic investors and causes asymmetric volatility beyond the bad news of the market. Stocks are sorted into five groups by the ratios of foreign investors' holding stock, and analyze if the lower ratios would lead to any difference in the asymmetry. We estimate bivariate GARCH model, diagonal BEKK, and find that stocks with lower proportion of foreign investors tend to show higher asymmetric volatility. Since stocks with lesser foreign investors tend to higher proportions of local investors, we can conclude that stocks with higher proportions of local investors tend to show higher asymmetric volatility. The effect of firm size was further analyzed to determine whether this was the cause of the asymmetric volatility. The stocks of five groups were again sub-divided by firm size into three groups, large, mid-cap, and small stocks. Within each group, additional asymmetry due to the unexpected net selling by foreign investors was evident in small and mid-cap stocks. Thus we claim that domestic individual investors' risk aversion would be a possible cause for the asymmetric volatility along with a bandwagon effect. Bandwagon effect arise since individual traders are aware that foreign investors are well-informed traders and choose to follow their action.

Decoding Investor Decision-Making: Unraveling Psychological Factors and Educational Moderation in Financial Markets

This study delves into the influence of psychological factors on investors' decision-making, with a focus on the moderating role of education. The target population comprises 883 domestic individual investors registered in the Pakistan Stock Exchange. Employing a structured questionnaire, opinions were gathered from a sample of 275 financial domestic individual investors. The findings reveal a positive and significant association between risk propensity, risk perception, and investment decisions. Conversely, herding behaviour exhibits a negative and significant impact, indicating that heightened herding behaviour reduces investors' decision to invest. Further analysis underscores the combined effect (moderating effect) of risk propensity financial literacy, revealing a significant yet negative impact on investors' decisions, while risk perception financial literacy demonstrates a positive and significant effect. The concluding table highlights the positively significant presence of loss aversion bias.

Smart money or chasing stars: Evidence from northbound trading in China

AbstractTo explore what kinds of roles foreign investors take in a gradually opening financial market, we propose the abnormal holding value ratio (AHVR) of northbound investors among stocks through China's Stock Connect Mechanism. We find that AHVR positively predicts the expected stock returns and significantly relates to firms' quality‐related fundamental information, especially profitability. Foreign investors learn the firm fundamentals before they invest in the Chinese market, which is different from the trading behaviour of domestic individual investors. The AHVR premium is larger among firms with higher attention of analysts who focus on effective information and with lower attention of individual investors who have behavioural bias. In all, the northbound inflows are smart money, which will increase the efficiency of the Chinese market instead of simply chasing stars that only grab investors' attention.

Price Momentum in Korea and the Effect of Investors’ Trading

This study investigates domestic individual, institutional and foreign investors’ trading, to test Hong and Stein (1999)’s behavioral explanation that momentum profit is generated as some uninformed investors underreact to information on medium-term prices. Using Hvidkjaer (2006)’s methodology, we examine the respective investors’ trading tendencies reflected in their active price-setting orders. We analyze a special database compiling details on every transaction for the stocks listed on the KSE during 1996:12~2009:08. During 2001~2007, individual investors’ underreaction in trading large-size winner stocks contributes to positive momentum profits. They seem to induce weak negative profits to emerge in 1997~2000, too. Foreign investors underreact to small-size loser stocks, incurring positive momentum profits during 2001~2007. They engage in positive feedback trading, when they trade large-size winner stocks. This trading tendency does not seem to be based on information on firm fundamentals, as we find those winner stocks’ returns are not sustained. Institutional investors’ trading seems to be relatively in line with future returns, but evidences are not strong enough to support they are informed investors. Overall, the behavioral hypothesis on investors’ underreaction seems to explain medium-term momentum profits in Korea, but evidences differing across subsamples suggest possibility of other unknown influences.

Foreigners at the gate? Foreign investor trading and the disposition effect of domestic individual investors

Using the account-level data of a major Korean securities firm between 1999 and 2005, we examine whether the strength of domestic individual traders’ disposition effect is affected by the inflow of foreign investors. Our sample period, beginning just after the liberalization that lifted the cap on foreign investor ownership, allows for an interesting insight into how domestic individuals perceive foreign investors’ entry into an emerging stock market. We find that individual investors are more likely to realize paper gains on stocks with large recent foreign investor purchase, which appears to be behaviorally motivated. These individual investors are also less likely to trade stocks with large foreign ownership in the first place, further hinting at their aversion. Our main results are robust to a difference-in-difference analysis based on the inclusion of a stock into the MSCI Korea index.

Daily Stock Trading by Investor Type and Information Asymmetry: Evidence from the Korean Market

ABSTRACTWe examine the influence of trading by heterogeneous investors on information asymmetry in the Korean stock market, which includes domestic and foreign institutional investors and individual investors. In particular, we examine the relationship between the daily trading volume and the level of information asymmetry reflected in the stock price. The results reveal that high-volume daily trading by domestic institutional and individual investors increases the degree of information asymmetry in the short term, but is more evident for individual investors. Foreign institutional investors tend to mitigate the information asymmetry. Finally, our findings are robust to an alternative measure of investor trading.

Market Reform and Efficiency: The Case of KOSPI200 Options

ABSTRACTThe Korean government and exchange have identified a need to regulate excessive speculative trading and to protect domestic individual investors from foreign and professional traders. As such, they have proposed an options market reform that requires higher levels of margin accounts for options trading and that increases the basic options multipliers in the KOSPI200 options market. This study examines how this market reform affects the price disagreement and adjustment behaviors of the index options market. Our analyses indicate that the efficiency and information quality of out-of-the-money options trades have increased since the reform took effect.

PIN, Adjusted PIN, and PSOS: Difference of Opinion in the Korean Stock Market

AbstractDuarte and Young (2009) decompose the probability of information‐based trading PIN into adjusted PIN (AdjPIN) and probability of trading caused by symmetric order flow shocks (PSOS). We explore sources of PSOS in the Korean stock market and examine the relation between PSOS and stock returns. Using transaction data with trader types and initiator information, we find that AdjPIN is not priced, while PSOS is negatively priced, a finding that Lai et al. (2014) label “puzzling.” We find that the negative price of PSOS comes from differences of opinion among domestic individual investors on the significance of public news.

Imputation tax system, dividend payout, and investor behavior: Evidence from the Taiwan stock exchange

Abstract This paper examines the change in corporate dividend policy and investor behavior in relation to the introduction of the imputation tax system in Taiwan. However, the findings of this study are unlike those of previous studies. Stock dividends are treated as a dividend for taxation purposes and represented the dominant payment mechanism in Taiwan before 1997. By contrast, both the number of firms paying cash dividends and aggregate cash dividend payments increase after the introduction of the imputation tax system. Consistent with the tax preference for the distribution of dividends, a higher level of tax deductible rate was associated with a higher cash dividend payout ratio. Domestic individual investors have been the only shareholders affected by the introduced dividend imputation, whereas the percentage of firms owned by domestic individual investors has decreased. However, the percentage of firms owned by foreign institutional investors has increased.

How Foreign Investors Influence Stock Markets? The Saudi Arabian Experience

This paper investigates the impact of foreign institutional investors on valuation, liquidity and volatility in Saudi stock exchange for the pre- and post-period from November 10, 2014 to June 12, 2015 and from June 15, 2015 to January 22, 2016 respectively, utilizing daily market trade data. Saudi regulators allowed foreign investment community to invest in Tadawul (i.e., Saudi stock exchange). The paper finds significant decline in prices of stocks in the post-liberalization period, suggesting that foreign traders aid in price discovery process and bringing the prices back to their fundamental values. In contrast to the policy makers’ intention and empirical evidence, the liquidity decreases and bid-ask spreads widen. These results imply that domestic individual investors engage in non-fundamental trading in the past, avoid trading against sophisticated foreign investors in the presence of heightened asymmetric information risk during the post-liberalization period.

Cross-border equity flows and market volatility: the case of Qatar Exchange

Purpose – Extending the extant literature and using Qatar’s equity market as a case study, this paper aims to look into the potential impacts of foreign investor groups’ trading activities on market volatility in comparison with those of Qatar’s domestic investor counterparts. Design/methodology/approach – The dataset is comprised of daily aggregated values of stock purchases and sales made separately by four investor groups, namely, foreign individual investors, foreign institutional investors, domestic individual investors, and domestic institutional investors. An ex post measure of volatility introduced by Rogers and Satchell (1991) is employed. Four proxies for investor trading are considered separately in the analysis. The objective of the study is empirically addressed in the context of the Generalized Method of Moments estimation technique. Findings – In general, there exists substantial contemporaneous price impact associated with foreign equity investment in the Qatari capital market, despite the fact that foreigners’ buy and sell trades are not as large as those of their domestic counterparts. More specifically, foreign institutional sales (purchases) tend to increase (reduce) market volatility. Like those of foreign institutions, the sell trades by foreign individuals have a positive impact on volatility. On the other hand, domestic institutional purchases are significantly negatively related with market volatility, whereas the sell trades by the same category have no impact on volatility. Finally, surprises in foreigners’ trading volumes turn out to be responsible for adding to volatility. Practical implications – Although a sudden reversal of foreign capital flows can pose a real threat to the stability of the Qatari capital market, such capital flows are deemed to be an indispensable vehicle for enhancing the liquidity and efficiency of the market. Accordingly, policy makers in Qatar should overhaul the current foreign investment legislation to make it even more streamlined and better suited to achieving the country’s strategic vision for the market. Foremost in these reforms is relaxing the stringent 25 percent foreign ownership restriction. Such a relaxation process is highly recommended to be phased in only gradually, in order to weigh its pros and cons. In this regard, the authorities concerned should consider embarking on a range of procedures intended to ward off the adverse ramifications of foreign capital outflows. Originality/value – To the author’s best knowledge, no study about the impact of foreign equity flows on domestic markets has been so far conducted using trading data from the Qatari market. This work presents one such attempt.

Foreign investors and the delay of information dissemination in the Korean stock market

This study examines whether foreign investors improve the transmission of global and local market information on individual stock prices in the Korean stock market from 1999 to 2012. We investigate the beneficial effect of foreign investors in the Korean market using the weekly trading data of domestic institutional, individual, and foreign investors. Using the normalized foreign trading share volume as a measure for foreign trading, we find that foreign trading significantly reduces delays in global market information dissemination, along with that of local market information, though not as much as that of global information. Next, we find a more significant relation between foreign trading and delays in information dissemination for global firms with high levels of international trading activity. This indicates that foreign investors are more advantaged than local investors with respect to global information. Finally, the trading of domestic institutional investors reduces delays in local and global information dissemination, but the effect of foreign trading persists, even after controlling for the trading of domestic institutional and/or individual investors.

PIN, Adjusted PIN, and PSOS: Difference of Opinion in the Korean Stock Market

Duarte and Young (2009) decompose PIN into adjusted probability of informed trading (AdjPIN) and probability of trading caused by symmetric order flow shocks (PSOS). We explore the sources of PSOS in the Korean stock market and examine the cross-sectional effect of PSOS on stock returns. Using transaction data with trader types and initiator information, we find that AdjPIN is not priced; PSOS is negatively priced, a finding that Lai et al. (2014) labeled “puzzling.” We find that the negative effect of PSOS comes from TURNOVER, the proxy for difference of opinion. After decomposing TURNOVER into trading activity of domestic institutional, domestic individual, and foreign investors, we find that domestic individual investors are the main drivers of the significant relationship between PSOS and expected returns. Our results show that individual investors generate PSOS through the difference of opinion on the significance of public news.

Are individual or institutional investors the agents of bubbles?

Behavioral bubble models typically assume that uninformed trend-chasers, presumably individual investors, cause bubbles, while informed contrarian investors such as institutions, trade against bubbles. DeLong et al. (1990a) highlight that to be considered a “bubble”, the mis-pricing must prevail in a large, diversified portfolio. To meet this criterion, we use a unique dataset of all transactions by investor type for all non-financial Korean firms, and find evidence at odds with such assumptions. Domestic individual investors systematically apply aggressive contrarian trades, while foreign and some domestic institutions are mostly trend-chasers. These findings suggest that institutional investors rather than individuals are agents of bubbles.

Is Informed Trading Different Across Investor Types?

In this study we compare the extent of informed trading across investor types in the Korean stock market using intraday quote and trade data from January 2006 to September 2013. We estimate for each stock the probability of information-based trading (PIN) using trades that are initiated by foreign institutional investors, domestic institutional investors, and domestic individual investors separately. The results show that PIN values of foreign and domestic institutional investors are much higher than those of individual investors. Contrary to the belief of some market participants, however, we find that PIN values of foreign institutional investors are lower than those of domestic institutional investors, suggesting that domestic institutional investors engage in more informed trading than foreign institutional investors. We also find a strong cross-sectional relation between PIN and stock/firm attributes.

Effect of the subprime mortgage crisis on a leading emerging market

This study examines how the US subprime mortgage crisis affects the behaviour of the Korean stock and futures market and how the futures traders react to the shocks related to the crisis. Analysing a unique and high-quality daily data set on the ABX subprime index of the United States, Korea's implied volatility index (VKOSPI), and the KOSPI200 index and futures, we find a significant linkage and contagion effect between the US subprime market and the Korean market during the crisis period. However, the explanatory power of the ABX index return dissipates during the period of the recovery (after 2010). Our analysis, based on unique information about the types of futures traders, indicates that foreign investors are quite sensitive to the subprime shocks, whereas domestic investors are not. Furthermore, the empirical findings indicate that domestic individual investors invest their money in the opposite direction of the ABX index's movement during the subprime crisis period.

On the buying and selling behaviour of investor categories: evidence from Qatar

This study sets out to identify the trading patterns of foreign investors versus those of Qatar's domestic counterparts. Specifically, two chief issues are addressed. First, whether the buyside and sellside behaviours of individual and institutional foreign investor groups are different from those of domestic counterparts; and second, whether the demonstrated trading patterns are persistent over time. To tackle these issues, a multivariate vector autoregression (VAR) is performed. Both daily and weekly frequencies are considered in the analysis. Overall, the results indicate that domestic individual investors tend to pursue contrarian strategies when they buy stocks. On the sellside, they switch their behaviour from contrarian to momentum at longer horizons. Domestic institutional investors act like contrarian traders, whether they buy or sell shares. Foreign institutional investors are momentum buyers but contrarian sellers. Foreign individual investors pursue contrarian buying and momentum selling strategies, irrespective of the data frequency used. Additionally, all investor categories tend to herd when buying/selling stocks. These results provide some practical policy implications.

Information effect of involuntary delisting and informed trading

This paper analyzes the information effect of involuntary delisting and the possibility of informed trading in the Korean stock market. We find that the abnormal return is between 80% and 90% due to involuntary delisting in the Korean market, where liquidity all but disappears as a result of delisting. Prior to delisting, however, domestic individual investors are net buyers of delisted firms while both domestic institutional investors and foreign investors are net sellers. On the other hand, the share ownership of large shareholders, on average, declines by more than 30% over the course of two years prior to involuntary delisting. Using delisting probability model, we find that the change in the share ownership of large shareholders is a significant predictor of delisting while that of domestic institutional investors and foreign investors is not. Our findings suggest that large shareholders reduce their share ownership in anticipation of delisting and that there is a wealth transfer from individual investors to large shareholders surrounding involuntary delisting in markets where the separation between ownership and control is weak and the participation of retail investors is large.

Investor perceptions of the benefits of political connections

Purpose– The purpose of this paper is to investigate how foreign and domestic investors differ in their beliefs about the relative merits of a firm's political connections.Design/methodology/approach– These differences are employed to explain cross-sectional variation in the previously documented premium in A-share prices relative to otherwise equivalent foreign currency denominated B-shares for Chinese firms.Findings– Chinese domestic individual investors were excluded from owning B-shares of Chinese firms prior to February 20, 2001. The authors find that firms with more political connections have higher premiums and a smaller reduction in premiums associated with this event.Research limitations/implications– This is consistent with domestic block holders deriving additional benefits from politically connected firms.Practical implications– The findings also have important policy implications by showing that government can have a strong effect on the economy even without applying macro-policy tools.Social implications– Government ownership in listed companies can result in discrepancies among classes of investors with respect to their valuations. Furthermore, the prohibition of short sales prevents arbitrage from correcting this bias, and eventually the role of the market in allocating resources efficiently is undermined.Originality/value– The authors investigate the role of political connections as implied by the proportion of state ownership in explaining the A-share premium. Unlike previous studies that associate state ownership with political risk, the paper relates state ownership to political connections that are particularly beneficial to domestic large block shareholders. This interpretation is consistent with the findings and with previous literature on state ownership and political connections of Chinese firms.

What types of investors generate the two-phase phenomenon?

We examine the two-phase phenomenon described by Plerou, Gopikrishnan, and Stanley (2003) [1] in the KOSPI 200 options market, one of the most liquid options markets in the world. By analysing a unique intraday dataset that contains information about investor type for each trade and quote, we find that the two-phase phenomenon is generated primarily by domestic individual investors, who are generally considered to be uninformed and noisy traders. In contrast, our empirical results indicate that trades by foreign institutions, who are generally considered informed and sophisticated investors, do not exhibit two-phase behaviour.