Abstract:

Foreign and domestic investors have shown different trading strategies in stock markets. For stock markets with foreign investor activity, however, previous studies indicate that they are exposed to risks related to volatility dan liquidity, especially during financial crisis. The purpose of this study is to analyze the characteristics of foreign and domestic investors regarding industry indexes. Using foreign and domestic investors 2013-2018 daily trading (buy and sell) data, we calculate daily Net Investment Flow (NIF) for each group of investors for each industry. We use vector autoregression (VAR) to estimate feedback trading behavior based on the relationship of daily industry index return and daily investor NIF. VAR estimation indicates that both foreign and domestic investors apply different feedback trading strategies for each industry index return. Foreign investors tend to react with positive feedback trading with shorter lags, while domestic investors tend to use negative feedback trading with longer lags. There is also an indication that domestic investors’ trading affects industry index movement, but we could not observe the same effect from foreign investors. The findings of this research offer new evidence regarding foreign and domestic investor behavior regarding industry indexes.