Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea

Lingxia Sun and Dong Wook Lee

International Review of Finance, 2017, vol. 17, issue 4, 561-596

Abstract: In this paper, we examine the factor exposures of foreign equity capital in a domestic stock market in order to understand its risk†taking behavior and sources of returns in the market. Using data from Korea for the 1999–2013 period, we find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor, which is long on low†IVOL stocks and short on high†IVOL stocks. That is, foreign equity capital is typically allocated to low†IVOL stocks and profits from the return differential between low†IVOL and high†IVOL stocks. We also find that foreign equity capital moves in a way that it is loaded more on the IVOL factor when the IVOL factor premium is larger. We discuss the comparative advantage of foreign equity capital in bearing the IVOL factor risk and the role of information asymmetry between locals and foreigners in this risk sharing. We also provide additional empirical results that support our interpretation.

Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/irfi.12129

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:irvfin:v:17:y:2017:i:4:p:561-596

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1369-412X

Access Statistics for this article

International Review of Finance is currently edited by Bruce D. Grundy, Naifu Chen, Ming Huang, Takao Kobayashi and Sheridan Titman

More articles in International Review of Finance from International Review of Finance Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().