The Relationship between Trades of Foreign Institutional and Retail Investors and Equity Return

Ros Zam Zam Sapian

Abstract


ABSTRACT

This study examined the relationship between equity flows and domestic equity returns using daily aggregate trade data categorized by two foreign investors’ classes; namely foreign institutional and retail investors. To explore the relationship between domestic equity returns and both buy and sale trades of foreign institutional and retail investors, this study employed bivariate vector autoregressive model and impulse response functions. The main finding of this study amongst others indicated that past equity returns do impact the sale trades of both foreign institutional and retail investors; however they are inversely related. The findings indicated that foreign institutional investors sell less during market upswing, while foreign retail investors sell more during upside market momentum. The finding of this study also revealed that there is a temporary impact of foreign retail investors’ buy trades on domestic equity returns, thus supports the information dissemination concept particularly with regard to price momentum.

Keywords: Momentum and contrarian trading strategies; foreign institutional and retail investors; sale and buy trades; vector autoregressive model; impulse response functions; emerging equity market.

ABSTRAK

Kajian ini mengkaji hubungan antara aliran ekuiti dan pulangan ekuiti domestik menggunakan maklumat dagangan agregat harian yang dikategorikan mengikut dua kelas pelabur asing iaitu pelabur institusi dan runcit asing. Untuk menguji hubungan antara pulangan ekuiti domestik dan kedua-dua dagangan belian dan jualan pelabur institusi dan runcit asing, kajian ini menggunakan model vektor autoregresif bivariat dan fungsi tindak balas impuls. Hasil utama kajian ini antaranya adalah pulangan ekuiti hari sebelumnya memberi impak terhadap dagangan jualan pelabur institusi dan runcit asing; walau bagaimanapun hubungannya adalah bertentangan antara satu sama lain. Penemuan kajian menunjukkan bahawa pelabur institusi asing kurang melakukan aktiviti penjualan manakala pelabur runcit asing lebih melakukan aktiviti penjualan semasa pasaran menaik. Penemuan kajian ini juga mendapati dagangan belian pelabur runcit asing mempunyai impak sementara terhadap pulangan ekuiti domestik, sekali gus menyokong konsep penyebaran maklumat terutamanya momentum harga.

Kata kunci: Strategi dagangan momentum dan kontrarian; pelabur institusi dan runcit asing; dagangan jualan dan belian; model vektor autoregresif; fungsi tindak balas impuls; pasaran ekuiti baru muncul


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