Foreign Equity Investors and Momentum Profits: Evidence from Korea
Lingxia Sun
¡ª Abstract ¡ª
This paper examines the trading behavior of foreigner equity investors and its impact on momentum profits. The Korean stock market makes a good setting for this study because of its openness to foreign investors and the availability of a rich dataset that records foreignners¡¯ holdings and trading of each individual stock on a daily basis. Following Grinblatt and Keloharju (2000)¡¯s methodologies, we find strong evidence of positive feedback trading by foreign investors for the period of 1999~2014. We also find that momentum profits are more pronounced among stocks that undergo bigger increases of foreigners¡¯ holdings. In addition, the big magnitude of momentum profits conditional on increases of foreigners¡¯ holdings is not affected by stocks¡¯ attributes, such as market capitalization, book-to-market ratio, beta, and turnover ratio. In our robustness checks, we construct momentum portfolios based on firm-specific returns and also observe significant firm-specific momentum profits for those stocks incurring increases in foreigners¡¯ holdings. Finally, we offer both risk- and behavior- based interpretations for our findings.
Keywords : Foreign Investors, Positive Feedback Trading, Momentum Profits
JEL Classification Number : G11, G12, G14, G15 |