Template-Type: ReDIF-Paper 1.0
Author-Name: Ingomar Krohn
Author-X-Name-First: Ingomar
Author-X-Name-Last: Krohn
Author-Name: Vladyslav Sushko
Author-X-Name-First: Vladyslav
Author-X-Name-Last: Sushko
Author-Name: Witit Synsatayakul
Author-X-Name-First: Witit
Author-X-Name-Last: Synsatayakul
Title: Foreign investor feedback trading in an emerging financial market
Abstract: This paper finds that trading by non-residents in an emerging financial market reinforces the existence of a momentum anomaly, in an apparent violation of an efficient market hypothesis. Using detailed order flow data in Thai foreign exchange, equity, and fixed income markets, we find that foreign investors engage in momentum trading, which amplifies positive feedback between returns and order flow across all asset classes. Innovations in foreign investor order flow are informative of future returns, but the information is not based on local macro fundamentals. Local financial investors tend to mimic foreign investor trading, reinforcing returns to momentum, while non-financial investors consistently provide liquidity. Further tests suggest that the returns to momentum trading are time-varying and are positively related to the amount of foreign capital flowing into the local financial market. Taken together, the results indicate that a significant presence of foreign investors can alter the trading behaviour of local investors and can reduce the importance of local fundamentals in driving asset prices.
Creation-Date: 2023-12
File-URL: https://www.bis.org/publ/work1154.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1154.htm
File-Format: text/html
Number: 1154
Keywords: international financial markets, heterogeneous trading, disaggregated order flow, foreign investors, emerging markets
Classification-JEL: F30, G11, G14, G15
Handle: RePEc:bis:biswps:1154