The Impact Of Foreign Investors’ Preferential Trading Behaviors On A-share Market

High-level opening of capital markets contributes to improving financial efficiency.However,for developing countries with less sound institutions and trading mechanisms,the entry of foreign investors can also lead to significant external shocks on shallow markets.In the case of the A-share market,access restrictions result in evident institutional features for foreign institutional investors at the current stage.Compared to domestic investors with a higher proportion of retail investors,foreign institutional investors with capital scale and information processing advantages usually adopt more rational and specialized trading strategies,which helps maintain the stable operation of China’s capital market.On the other hand,due to the developmental stage of the A-share market and the immaturity of regulatory systems,the market has high opacity and incomplete information transmission mechanisms,making it difficult for investors to identify and evaluate company value.This is particularly true for foreign investors who are distant from the investment country,facing greater information barriers and costs,leading to irrational investment behavior.Therefore,based on the theory of investor heterogeneity,this paper believes that the heterogeneous investment behavior of domestic and foreign investors will show significant differences due to differences in capabilities,preferences,and information,and attempts to explore the impact of foreign investors’ heterogeneous investment behavior on the A-share market.Taking into account the preference of foreign investors,known as "northbound funds," for large-cap stocks with better information disclosure,which may be a passive result of foreign investors facing information barriers,this paper uses the difference in returns between large-cap and small-cap stocks,namely the scale premium level of A-shares,as an observation indicator to analyze in-depth the impact of foreign investors’ heterogeneous trading behavior on the A-share market under conditions of information asymmetry.In terms of analytical methods,this paper first derives a dynamic model that considers noise traders,rational traders,and two types of securities with different market capitalizations,aiming to explain the preference of foreign investors for large-cap stocks and its potential impact on the synchronicity of large-cap and small-cap stocks from a mathematical perspective.Empirically,this paper first estimates a TVP-SV-VAR model with three variables to confirm the impact of information asymmetry on the heterogeneous behavior of foreign investors and explain the reasons for their preference-driven trading behavior.Furthermore,this paper empirically examines the impact of foreign investors’ heterogeneous preference for large-cap stocks on the scale premium of the A-share market by constructing univariate and multivariate GARCH models.The research findings reveal that changes in the degree of information asymmetry have a more pronounced impact on foreign investors,and their heterogeneous preference leads to excess returns in large-cap stocks in the A-share market.Moreover,foreign trading behavior enhances the synchronicity of large-cap and small-cap stocks while also causing certain shocks to the relative returns of these stocks.This paper provides a new perspective on understanding the impact of foreign investors on the A-share market in the process of capital market opening,and the research conclusions have significance in exploring the dual-edge effect of short-term capital inflows on improving financial efficiency and creating exogenous shocks.