Why do foreign investors underperform domestic investors in trading activities? Evidence from Indonesia

Foreign investors generally underperform domestic investors in trading activities. This study shows that their inferior performance is attributable to non-initiated orders. Foreign investors actually perform better than domestic investors in initiated orders. In addition, their performance is also mixed when trades are classified depending on who the counterparties are. These mixed performances can be explained by neither the information disadvantage hypothesis proposed by [Dvo?ák, T., 2005. Do domestic investors have an information advantage? Evidence from Indonesia. Journal of Finance 60, 817–839.] nor the poor timing of trade hypothesis suggested by [Choe, H., Kho, B.C., Stulz, R., 2005. Do domestic investors have an edge? The trading experience of foreign investors in Korea. Review of Financial Studies 18, 795–829.]. We propose and confirm that their inferior performance is explained by their aggressive trading behavior. Three metrics we utilize to measure the aggressiveness of foreign investors’ trading provide overwhelmingly strong evidence that foreign investors are more aggressive than their domestic counterparts.     

Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea

We investigate whether domestic investors have an edge overforeign investors in trading domestic stocks. Using Korean data,we show that foreign money managers pay more than domestic moneymanagers when they buy and receive less when they sell for mediumand large trades. The sample average daily trade-weighted disadvantageof foreign money managers is 21 basis points for purchases and16 basis points for sales. There is also some evidence thatdomestic individual investors have an edge over foreign investors.The explanation for these results is that prices move more againstforeign investors than against domestic investors before trades.     

Informed trading before positive vs. negative earnings surprises

This paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises. Using Korean data over the period of 2001–2010, we find that information asymmetry is larger before negative earnings surprises (earnings shock) among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry. We also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news. Finally, we find that institutional trade imbalance is positively related to the post-announcement abnormal returns of negative events. This study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements.     

Do locals know better? A comparison of the performance of local and foreign institutional investors

We compare the performance of local versus foreign institutional investors using a comprehensive data set of equity holdings in 32 countries during the 2000–2010 period. We find that foreign institutions perform as well as local institutions on average, but only domestic institutions show a trading pattern consistent with an information advantage. Our results suggest a smart-money effect of local institutions in countries subject to higher information asymmetry, non-English speaking countries, countries with less efficient stock markets, with poor investor protection, or high levels of corruption. The local advantage is more pronounced in periods of market turmoil and in illiquid stocks.     

Interaction of investor trades and market volatility: Evidence from the Tokyo Stock Exchange

This paper examines the relation between market volatility and investor trades by identifying who supplies and demands market liquidity on the Tokyo Stock Exchange. Because the different trading patterns of various investor types such as individual investors, institutional investors, and foreign investors affect market liquidity differently, we find that market volatility fluctuates significantly depending on which investor types participate in trade. We show that market volatility increases by more than 50% from the average level when there are greater buy trades by momentum investors that demand liquidity and there are less sell trades by contrarian (or profit-taking) investors that supply liquidity. On the other hand, volatility dampens by more than 57% when there are greater sell trades by profit-taking investors, mostly by domestic investors, while there are less momentum buy trades.     

Futures Market Sentiment and Institutional Investor Behavior in the Spot Market: The Emerging Market in Taiwan

This paper investigates whether and how futures market sentiment and stock market returns heterogeneously affect the trading activities of institutional investors in the spot market in Taiwan. Our empirical results suggest that foreign investors are net sellers whenever futures market sentiment is bullish and net buyers when investor sentiment is bearish. The two types of domestic institutional investors have poor sentiment timing abilities and the price-pressure effect may account for the behavioral differences among institutional investors. In addition, all three institutional investors are momentum traders. Nevertheless, the momentum trading of foreigners is consistent with an information-based model and that of two local institutional investors, as behavior-based models suggest. This indicates that the same trading momentum strategy can lead to different outcomes for different investors, and both information- and behavior-based momentum trading can exist contemporaneously in the Taiwanese stock market.     

Which Traders Contribute Most to Price Discovery? Evidence from the KOSPI 200 Options Market

We examine which group of investors—individuals, institutions, or foreigners—has more information about the true price process in the Korea Stock Price Index 200 (KOSPI 200) options market. Using the Hasbrouck (1995) information share and the Gonzalo and Granger (1995) common factor weight approach, we show that foreigners are the most informative about the efficient price process, and domestic institutional investors as well as individual investors have small contribution to price discovery. This result holds firmly, even after controlling for the effects of trading volume and the number of trades. Our empirical results suggest that foreigners are informed traders in the KOSPI 200 options market, consistent with the findings of Ahn, Kang, and Ryu (2008).     

Institutional Investor Trading in a Short Investment Horizon: Evidence from the Korean Stock Market

We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.     

A logit model of retail investors' individual trading decisions and their relations to insider trades

Among the various external information sources that influence individual investors' trading decisions, no research has considered the important influence of insiders' transactions. Retail investors might copy the behavior demonstrated by insiders' trading; therefore, this study establishes an approach to estimate the buying probability for a certain stock by a certain investor at a certain point in time and analyzes whether insider trade reports influence this probability. Using a sample of more than 270,000 retail trades in Germany between 2008 and 2009, along with more than 3000 insider trades in the same period, we find evidence of copying of insiders' trades by retail investors. The basic mimicry hypothesis holds, even when we consider an information event hypothesis and an insider attention effect hypothesis as alternative explanations. A robustness test also supports the findings.     

Price Comovement and Institutional Performance Following Large Market Movements

This paper investigates the price comovement of stocks actively traded by institutions and the investment performance of foreign and domestic institutional investors in Taiwan's stock markets during periods of large market movements. Stocks of small size, high share turnover, and high return volatility tend to move together with the market when markets rise sharply. In short-term holdings, foreign investors and domestic mutual funds can outperform the market by trading small-size, high-turnover, and high-volatility stocks.     

Who wins in the money game? The case of KOSPI 200 futures

This study investigates the information advantage of each investor category (i.e., foreigners, individuals, institutions, and the others) in the Korean stock index (i.e., KOSPI 200) futures market. To evaluate the information advantage of each investor category, we calculate futures trading and position gains; review and criticize the Value Weighted Average Price (VWAP) measure; and develop adjusted VWAP measures that are consistent with trading gains. Our main inferences are made based on adjusted VWAP measures. This study analyzes the transaction data of the nine years from January 1998 through 2006. From the perspectives of the adjusted VWAP measures, our findings support the information advantage of foreign investors over domestic (particularly, domestic individual) investors in the KOSPI 200 futures market.     

Fool's mate: What does CHESS tell us about individual investor trading performance?

We investigate the short‐term relation between individual investor trading and stock returns on the Australian Securities Exchange. Stocks heavily bought by individual investors underperform stocks heavily sold over the subsequent three days, with respective returns on to a long–short portfolio of ?93, ?67 and ?12 basis points on days one, two and three. Individuals underperform in small and mid‐size stocks when they trade passively using limit orders waiting for the market price to move in their favour. Individuals underperform in large stocks when they trade aggressively using marketable orders. Foreign institutions gain from taking the opposite side of individual trades. We present an information asymmetry‐based explanation for the findings.     

Order submission behaviors and opening price behaviors: evidence from an emerging market

Recent studies document that mutual funds demonstrate an overnight information advantage over foreign investors in Taiwan, a fast emerging market. However, this inequality contradicts the documented foreign investors’ growing market dominance and information advantage. Motivated by the inconsistency, we apply intraday data to examine the linkage between investors’ order submission behaviors and the opening price behaviors of the top net-trade stocks of professional institutional investors. We find that mutual funds exhibit a more persistent and aggressive trading pattern than foreign investors. The order submission behavior of aggressive individuals, following closely mutual funds’ trades, mainly drives the observed informational differences.     

Information,hedging demand,and institutional investors: Evidence from the Taiwan Futures Exchange

This paper examines the effect of hedging demand by various types of institutional investor on subsequent returns and volatility. Using data from the Taiwan Futures Exchange, empirical results indicate that the hedging demand of foreign investors has a significant negative impact on subsequent returns and volatility. In addition, trading strategies based on the extreme hedging demand of foreigners are positively correlated with trading performance. Furthermore, there is evidence to show that returns (volatility) also affect the subsequent hedging demand of foreign investors, suggesting a feedback relation. Finally, the hedging demand of foreign investors has a greater impact on subsequent returns and volatility after global financial turmoil. Accordingly, this paper concludes that foreign investors are informed hedgers in the Taiwan futures market, especially after global financial turmoil.     

Asymmetric investor behavior between buyside and sellside: Evidence from investor classes in the Sri Lankan stock market

Using unique trading data for investor classes from Sri Lanka, this study finds asymmetric investor behavior between buyside and sellside in large trades. Investors are positive feedback traders on the buyside and contrarians on the sellside. Domestic investors exhibit more feedback and contrarian behavior than foreign investors, suggesting that foreign investors are more informed on the buyside and less informed on the sellside. Individuals are more feedback and contrarian traders than institutions. Foreign institutional investor sales do not precede, coincide with, or lead to significant returns. Trades do not lead to price momentum or reversals, but leave a permanent positive price effect.     

Do sentiment trades explain investor overconfidence around analyst recommendation revisions?

This study examines irrational stock market reactions to analyst recommendation revisions depending on investor sentiment levels prior to analyst report announcements. We construct a firm-specific sentiment indicator by extending Huang et al. (2015, Review of Financial Studies, 28, pp.791–837). Analyst recommendation revisions have more pronounced effects for downgrades, which is attributable to sentiment effects. Domestic investors tend to react less to upgrades (downgrades) news when their prior beliefs are pessimistic (optimistic), implying that they are overconfident. The domestic investors drive sentiment trades, whereas foreign investors are not biased.     

Who moves the stock market in an emerging country – Institutional or retail investors?

By analyzing the dynamic behavior of institutional and retail investors in the Indonesia Stock Exchange using their completed transactions (comprising over 250 million observations), this study highlights that their trading strategies and behavior, in which institutions play a more important role than individuals in the market, are indeed different. Specifically, past trading activities by individual (institutional) investors have significantly affected the current trading behaviors and strategies of individual investors (both investor types). Furthermore, retail (institutional) investors are most likely to perform contrarian (momentum) strategies and trade frequently (infrequently) with small (large) amounts of money and short (long) holding periods.     

The Interim Trading Skills of Institutional Investors

Using a large proprietary database of institutional trades, this paper examines the interim (intraquarter) trading skills of institutional investors. We find strong evidence that institutional investors earn significant abnormal returns on their trades within the trading quarter and that interim trading performance is persistent. After transactions costs, our estimates suggest that interim trading skills contribute between 20 and 26 basis points per year to the average fund's abnormal performance. Our findings also indicate that any trading skills documented by previous studies that use quarterly data are biased downwards because of their inability to account for interim trades.     

Foreign institutional investors,information asymmetries,and asset valuation in emerging markets

This study investigates the effects of information asymmetries and asset valuation model differences (investor heterogeneity) between foreign and domestic investors on their distinct portfolio holdings in an emerging market setting. I argue that information asymmetry and investor heterogeneity views significantly interact in explaining the different asset allocation decisions of foreign and domestic investors. Employing a large dataset from Turkey, the findings suggest that both information asymmetry and investor heterogeneity view play a key role in explaining the investment decisions of different investor groups. Specifically, different from domestic investors, foreign investors are more likely to invest in firms with a higher global market performance which supports the investor heterogeneity view. However, this relationship only holds for firms with high information asymmetries. The difference in valuation models between foreign and domestic investors converge when asymmetric information problems between these investor groups weaken. This study contributes to the international finance literature by providing a new explanation of why foreign and domestic investors invest in different assets.     

The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience

Since the popular uprising of January 2011, a series of momentous events has rocked Egypt’s political order, jeopardising the country’s economic and financial stability. This study examines the role of foreign capital flows in the volatility of the Egyptian equity market, and whether this role has changed due to the recent domestic political unrest. These issues are empirically addressed in the context of GMM estimation. The results suggest that, unlike those of foreign individual investors, trades of foreign institutional investors contribute to market fluctuations, whether prior to or following the January 2011 uprising. Sell trades by foreign individual and institutional investors exert a significant influence on volatility. Further, when volume is split into its anticipated and unanticipated components, the results show that surprises in trading activity by either group tend to exacerbate volatility in periods of calm and turmoil. These findings are broadly insensitive to volatility measures and robust, even after controlling for a variety of relevant determinants of market volatility. The evidence documented in this study provides important implications for policy markers.