Using a unique data set, we study the trading behavior of foreign portfolio investors in Korea before and during the currency crisis. Different categories of investors have significant differences as well as similarities. First, non-resident institutional investors are always positive feedback traders, whereas resident investors before the crisis were negative feedback (contrarian) traders but switch to be positive feedback traders during the crisis. Second, individual investors herd significantly more than institutional investors. Non-resident (institutional as well individual) investors herd significantly more than their resident counterparts. Third, differences in the Western and Korean news coverage are correlated with differences in net selling by nonresident investors relative to resident investors.

This paper explores daily, international portfolio flows into and out of 44 countries from 1994 through 1998. We find several facts concerning the behavior of flows and their relationship with equity returns. First, we detect regional flow factors that have increased in importance through time. Second, the flows are stationary, but far more persistent than returns. Third, flows are strongly influenced by past returns, consistent with positive feedback trading by international investors. Fourth, inflows have positive forecasting power for future equity returns, statistically significant in emerging markets. Fifth, the sensitivity of local stock prices to foreign inflows is positive and large. Sixth, prices seem consistent with flow persistence, in that transitory inflows impact future returns negatively.

We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positive feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return mean-reversion in the year following large changes in institutional ownership -- stocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum. 1 "Herding" (a group of investors trading in the same direction over a period of time) and "feedback trading" (correlation between herding and lag returns) have the potential to explain a number of financial phenomena, e.g., excess volatility, momentum, and reversals in stoc...

We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

We study the interrelationship between capital °ows, returns, dividend yields and world interest rates in 20 emerging markets. We estimate a vector autoregression with these variables to measure the degree to which lower interest rates contribute to increased capital °ows and shocks in °ows a®ect the cost of capital among other dynamic relations. We precede the VAR analysis by a detailed examination of endogenous break points in capital °ows and the other variables. These structural breaks are traced to the liberalization of emerging equity markets. Our evidence of structural breaks calls into question past research which estimates VAR models over the full sample. After a liberalization, we ¯nd that equity °ows increase by 1.4 % of market capitalization. We also show that shocks in equity °ows initially increase returns which is consistent with a price pressure hypothesis. While the e®ect is diminished over time, there also appears to be a permanent impact. This is consistent with our ¯nding that our proxy for the cost of capital, the dividend yield, decreases. Finally, our analysis of the transition dynamics from pre-liberalization to post-liberalization suggests that when capital leaves, it leaves faster than it came in. These results may help us understand the dynamics of the recent crises in

We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset pricing models with mean-variance investors predict that an asset’s risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country’s risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase

For U.S. stock prices, evidence of mean reversion over long horizons is mixed, possibly due to lack of a reliable long time series. Using additional cross-sectional power gained from national stock index data of 18 countries during the period 1969 to 1996, we find strong evidence of mean reversion in relative stock index prices. Our findings imply a significantly positive speed of reversion with a halflife of three to three and one-half years. This result is robust to alternative specifications and data. Parametric contrarian investment strategies that fully exploit mean reversion across national indexes outperform buy-and-hold and standard contrarian strategies. Mean reversion refers to a tendency of asset prices to return to a trend path. The existence of mean reversion in stock prices is subject to much controversy. Fama and French ~1988a! and Poterba and Summers ~1988! are the first to provide direct empirical evidence that mean reversion occurs in U.S. stock prices over long horizons. 1 Others are critical of these results: Lo and MacKinlay ~1988! find evidence against mean reversion in U.S. stock prices using weekly data; Kim, Nelson, and Startz ~1991! argue that the mean reversion results are only detectable in prewar data; and Richardson and Stock ~1989! and Richardson ~1993! report that correcting for small-sample bias problems may reverse the Fama and French ~1988a! and Poterba and

This paper is based on a presentation made to the conference on Valuation in Emerging Markets at University of Virginia, May 28-30, 2002. We have benefited from discussions with and the comments of Chris Lundblad and Bob Brunner. *Corresponding author. E-mail address: cam.harvey@duke.edu

We use a two-year panel of individual accounts in an S&P 500 index mutual fund to examine the trading and investment behavior of more than 91 thousand investors who have chosen a low-cost, passively managed vehicle for savings. This allows us to characterize investors ’ heterogeneity in terms of their investment patterns. In particular, we identify positive feedback traders as well as contrarians whose activities are conditional upon preceding day stock market moves. We test the consistency and profitability of these conditional strategies over time. We find that more frequent traders are typically contrarians, while infrequent traders are more typically momentum investors. The dynamics of these investor classes help us to partially examine the question of the marginal investor over the period of our study. We find that the behavior of momentum investors is typically more correlated to changes in the S&P 500 and we trace its dynamics over time. We build up “behavioral factors ” based on contrarian and momentum flows and show that they perform well against a benchmark of loadings on latent factors extracted from returns. We also use the behavior of momentum and contrarian investors to build a measure of “market polarization”. This captures the dispersion of beliefs among the investors and helps to account for asset pricing better than standard measures of dispersion of beliefs. Acknowledgments: We thank Fidelity for providing us with the data for this study. We thank the International Center for Finance at the

Using transaction data from the Jakarta Stock Exchange, I find three pieces of evidence which indicate that domestic investors have an information advantage over foreign investors. First, foreign investors systematically buy at higher and sell at lower intra-day prices than domestic investors. Second, foreign investors tend to sell prior to large positive returns. Finally, the permanent impact of foreign purchases is smaller than that of domestic purchases. Over time, prices at which foreign investors trade have worsened, while foreign selling prior to positive returns has disappeared.