Interaction between Foreign and Domestic Investors in the Korean Stock and Futures Markets

Authors: Song, Young-Rae; Yang, Yong-Jun; Oh, Hyung-Sik

Source: Asian Economic Journal, Volume 23, Number 2, June 2009 , pp. 249-267(19)

Buy & download fulltext article:

Price: $48.00 plus tax (Refund Policy)

Abstract:

The present paper analyzes the behavioral relations of major investor groups in the stabilized Korean stock and futures markets after the 1997 Asian financial crisis. Investor groups cannot be classified as positive or negative feedback traders on market returns when both stock and futures markets are considered, which is inconsistent with the results in Ghysels and Seon (2005). Foreign investors and domestic institutions tend to take opposite positions in both markets. The impact of foreign investors on the basis change is significantly negative in the futures market, whereas domestic institutions have a negative relation in the stock market. This supports the view that selling activity of foreign investors in the futures market pulls the futures price down compared with the index value and, consequently, induces the reverse cash-and-carry trade of domestic institutions. This relationship, which negatively influenced the Korean economy during the crisis, as shown in Ghysels and Seon (2005), still exists in the Korean financial markets.

Keywords: futures market; investor behavior; basis; cash-and-carry trade; vector autoregression; G1; F3

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-8381.2009.02007.x

Affiliations: 1: 39-318, Investment Engineering Lab, College of Engineering, Seoul National University, Gwanak-gu, Seoul 151-744, South Korea

Publication date: 2009-06-01