How does FX liquidity affect the relationship between foreign ownership and stock liquidity? |
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| Institution: | 1. Economic Research Institute, The Bank of Korea, 39 Namdaemun-ro, Jung-gu, Seoul 04531, Republic of Korea;2. College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 03063, Republic of Korea;1. Bilkent University, Faculty of Business Administration, Cankaya, Ankara 06800, Turkey;2. Central Bank of the Republic of Turkey, Markets Department, FX Markets Division, Ulus, Ankara 06050, Turkey;3. Trinity Business School, Trinity College Dublin, Dublin 2, Ireland;4. University of Sydney Business School, University of Sydney, Sydney, New South Wales, Australia;5. Distinguished Research Fellow, Institute of Business Research, University of Economics Ho Chi Minh City, 59C Nguyen Dinh Chieu, Ward 6, District 3, Ho Chi Minh City, Vietnam |
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| Abstract: | This study investigates the roles foreign investors play in a representative emerging market, focusing on the relationship between foreign ownership and stock market liquidity as well as this relationship's response to foreign exchange (FX) liquidity. Our analyses yield three main results. First, the bid–ask spread and price impact of stock trades decrease along with foreign ownership, supporting the view that foreign investors tend to improve stock liquidity. Second, foreign ownership decreases along with a decline in FX liquidity, suggesting that foreign investors care about FX liquidity when determining their stock holdings. Third, stock liquidity increases continuously along with foreign ownership as FX liquidity decreases. Overall, this study's evidence indicates that foreign investors, as liquidity providers, can play a positive role in an emerging economy even when FX liquidity declines. |
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