| This paper investigates the investment behavior of foreign investors in the Korean stock market from 1999 to 2003, using daily stock transactions data. The main question is whether foreigners are more sophisticated than domestic investors. Price impacts of net buys by market participants are measured as a means to examine the investor sophistication, based on the key hypothesis that information embedded in trades of investors causes a persistent price impact (Hasbrouck, 1991).; A VAR with an exogenous variable is used to measure price impact of net-buys, and the price impact is designed to represent only the investor sophistication, controlling two other possible sources of price impact, which are firm-specific information and demand shock effect. Impulse responses are measured by the Generalized Impulse Response by Pesaran and Shin (1998), which is invariant to the ordering of variables.; I find that net-buys by foreigners are strongly correlated with stock returns on D + 0, but have smaller price impact than domestic investment trusts from D + 1, meaning that foreigners have less investor sophistication. Trades of foreigners are not actually followed by other domestic investor groups. Foreigners just engage in positive feedback trading, or buying when prices rise and selling when prices fall. They also show strong persistence in their net-buys during the sample period. |
