The Changing Role of Foreign Investors in Tokyo Stock Price Formation

Kentaro Iwatsubo and Clinton Watkins

No 2106, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: Recent research suggests that foreign investors improve the informational efficiency of national stock markets. We examine how foreign investors contribute to efficiency. We model the influence of domestic and foreign investors’ trades on the efficient price of Japanese stocks over 39 years. Our results show that foreign investors trade at an information advantage over domestic investors, and this advantage has increased since around 2000. We find this is due to a substantial increase in the importance of global stock price and exchange rate information in stock price formation. Our results suggest that foreign investors have made more use of global information in trading Japanese equities as the influence of international financial factors on the domestic market has increased over recent decades.

Pages: 40 pages
Date: 2021-02
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Citations: View citations in EconPapers (2)

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