Foreign Equity Investors and Momentum Profits: Evidence from Korea
― Abstract ―
This paper examines the trading behavior of foreigner equity investors and its impact on momentum
profits. The Korean stock market makes a good setting for this study because of its openness to
foreign investors and the availability of a rich dataset that records foreignners’ holdings and trading
of each individual stock on a daily basis. Following Grinblatt and Keloharju (2000)’s methodologies,
we find strong evidence of positive feedback trading by foreign investors for the period of 1999~2014.
We also find that momentum profits are more pronounced among stocks that undergo bigger increases
of foreigners’ holdings. In addition, the big magnitude of momentum profits conditional on increases
of foreigners’ holdings is not affected by stocks’ attributes, such as market capitalization, book-to-market
ratio, beta, and turnover ratio. In our robustness checks, we construct momentum portfolios based
on firm-specific returns and also observe significant firm-specific momentum profits for those stocks
incurring increases in foreigners’ holdings. Finally, we offer both risk- and behavior- based interpretations for our findings.
Keywords : Foreign Investors, Positive Feedback Trading, Momentum Profits
JEL Classification Number : G11, G12, G14, G15