Herding by foreign investors and emerging market equity returns: Evidence from Korea

This paper studies the effect of herding by foreign investors on stock returns in the Korean market. We conduct both pre and post-liberalization analyses and utilize a three-stage least squares analysis in order to control for the simultaneous relationship. We find evidence of a significant impact o...

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Bibliographic Details
Published in:International review of economics & finance 2010-10, Vol.19 (4), p.698-710
Main Authors: Jeon, Jin Q, Moffett, Clay M.
Format: Article
Language:English
Subjects:
Emerging markets
Feedback trading
Foreign investment
Herding
Herding Feedback trading Foreign investment Emerging markets
Impact analysis
International finance
Investment policy
Investments
Rates of return
Securities trading
Studies
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Summary:This paper studies the effect of herding by foreign investors on stock returns in the Korean market. We conduct both pre and post-liberalization analyses and utilize a three-stage least squares analysis in order to control for the simultaneous relationship. We find evidence of a significant impact of foreign investor herding on stock returns in addition to intra-year positive feedback trading by foreign investors. However, changes in domestic institutional ownership do not have any significant effect on stock returns. In addition, foreign investors tend to buy/sell shares that domestic institutions sell/buy in the herding year.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2010.03.001