Foreign investor trading, local investor mimicry and stock price volatility

Xingxin Zheng, Yuanyuwei Gao, Haitong Li and Xiangyang Zhao

Pacific-Basin Finance Journal, 2025, vol. 93, issue C

Abstract: The impact of foreign investor trading on financial market stability in host economies has emerged as a critical issue in international finance. This paper examines the relationship between foreign investor trading and stock price volatility within the unique institutional setting of China’s Stock Connect program, a landmark initiative in cross-border market integration. Leveraging high-frequency daily transaction data, we provide robust empirical evidence on the effects and transmission mechanisms of foreign trading. Our findings reveal that foreign investor trading significantly amplifies future stock price volatility. We also identify the local investor mimicry effect as a key mechanism: foreign investor trading serves as an informational signal, prompting local (retail) investors to replicate their strategies, which exacerbates order imbalances and trading intensity, thereby amplifying stock price fluctuations. Heterogeneity analysis further demonstrates that this mimicry effect is particularly pronounced among firms with lower information transparency, where local investors rely more heavily on foreign trading signals. To address endogeneity concerns, we conduct robustness checks incorporating exogenous interruptions in foreign trading activities, which further corroborate our main results. This study contributes to the literature on capital market liberalization and stock market volatility by offering novel insights into the behavioral spillover effects of foreign trading in emerging markets.

Keywords: Foreign investors; Stock price volatility; Investor mimicry; Cross-border connectivity; Financial market (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X25002124
Full text for ScienceDirect subscribers only

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:eee:pacfin:v:93:y:2025:i:c:s0927538x25002124

DOI: 10.1016/j.pacfin.2025.102875

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().