Foreign investor feedback trading in an emerging financial market

Ingomar Krohn, Vladyslav Sushko and Witit Synsatayakul

No 1154, BIS Working Papers from Bank for International Settlements

Abstract: This paper finds that trading by non-residents in an emerging financial market reinforces the existence of a momentum anomaly, in an apparent violation of an efficient market hypothesis. Using detailed order flow data in Thai foreign exchange, equity, and fixed income markets, we find that foreign investors engage in momentum trading, which amplifies positive feedback between returns and order flow across all asset classes. Innovations in foreign investor order flow are informative of future returns, but the information is not based on local macro fundamentals. Local financial investors tend to mimic foreign investor trading, reinforcing returns to momentum, while non-financial investors consistently provide liquidity. Further tests suggest that the returns to momentum trading are time-varying and are positively related to the amount of foreign capital flowing into the local financial market. Taken together, the results indicate that a significant presence of foreign investors can alter the trading behaviour of local investors and can reduce the importance of local fundamentals in driving asset prices.

Keywords: international financial markets; heterogeneous trading; disaggregated order flow; foreign investors; emerging markets (search for similar items in EconPapers)
JEL-codes: F30 G11 G14 G15 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-fdg, nep-fmk, nep-ifn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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