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Bigger Fish in Small Pond: The Interaction between Foreigners’ Trading and Emerging Stock Market Returns under the Microscope

Numan Ülkü and Enzo Weber

No 451, University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics

Abstract: This paper provides the first study of foreign investors’ trading in a sizeable European emerging stock market, using a combination of daily and monthly complete data collected at the destination. It also introduces the structural conditional correlation (SCC) methodology to identify the contemporaneous interaction between foreign flows and returns. We show that global emerging market returns are an additional driver of foreign flows after controlling for global developed market returns. Foreigners do negative (positive)-feedback-trade with respect to local returns at the monthly (daily) frequency. SCC methodology shows that the standard assumption in the literature that flows cause returns but not vice versa is not justified even at the daily frequency, making price impact estimates reported in previous literature questionable.

Keywords: Foreign investors' trading in emerging stock markets; feedback trading; price impact; structural VAR; structural conditional correlation (search for similar items in EconPapers)
JEL-codes: C32 G15 (search for similar items in EconPapers)
Date: 2011-01-10
New Economics Papers: this item is included in nep-ifn and nep-mst
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