THE CONTRIBUTION OF FOREIGN INVESTORS TO PRICE DISCOVERY IN THE INDONESIAN STOCK EXCHANGE

Josephine Sudiman (), David Allen and Robert Powell
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Josephine Sudiman: Polytechnics State of Padang, Kampus Limau Manis, Padang, Sumatera Barat, West Sumatra 25000, Indonesia

Annals of Financial Economics (AFE), 2013, vol. 08, issue 02, 1-24

Abstract: This article examines the contribution of foreign investors to price discovery by applying a vector error correction model (VECM) to 30 frequently-traded stocks on the Indonesia Stock Exchange. We use the Lee and Ready (1991) rule to determine the initiator of a trade and compute the volume weighted average price (VWAP) for every 30 min interval during the period 2004–2006. There are three key findings. First, foreign investors are more aggressive than local investors in placing their orders yet foreigners do not trade as often as locals. Second, the profits of foreign investors are smaller than local investors. Third, foreign investors need to adjust their trade price at a higher magnitude to achieve price equilibrium, which indicates that the majority of price discovery occurs among local investors in the Indonesian market.

Keywords: Price discovery; foreign investors; vector error correction model; JEL Classifications: G10; JEL Classifications: G12; JEL Classifications: G15 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S2010495213500085

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