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Asian Review of Financial Research, Vol., No..
pp.1033~1061
pp.1033~1061
Does information asymmetry really explain the extrapolative expectation of foreign investors?
Hyung Cheol Kang Respectively, the University of Seoul
Dong Wook Lee Korea University Business School
Eun Jung Lee Hanyang University
Kyung Suh Park Korea University Business School
It is often argued that foreign investors in a domestic market have an extrapolative expectation because of their informational disadvantages. More precisely, the claim is that foreign investors, absent other sources of information, revise their expectation about the future price of a domestic stock more in line with its current price change. In this paper, we analytically show that a temporary component in stock price makes it possible that better informed or long-term investors are more extrapolative and that their greater response to a given price change is in fact short-lived. We empirically confirm these and other implications of our analysis using the quote data for the futures contracts written on a broad-based Korean stock market index. Specifically, we find that compared with domestic investors, foreign investors show a greater reaction to price changes only at a short measurement interval and that their performance is better than that of domestic investors particularly for a longer investment horizon.
Hyung Cheol Kang
Dong Wook Lee
Eun Jung Lee
Kyung Suh Park
It is often argued that foreign investors in a domestic market have an extrapolative expectation because of their informational disadvantages. More precisely, the claim is that foreign investors, absent other sources of information, revise their expectation about the future price of a domestic stock more in line with its current price change. In this paper, we analytically show that a temporary component in stock price makes it possible that better informed or long-term investors are more extrapolative and that their greater response to a given price change is in fact short-lived. We empirically confirm these and other implications of our analysis using the quote data for the futures contracts written on a broad-based Korean stock market index. Specifically, we find that compared with domestic investors, foreign investors show a greater reaction to price changes only at a short measurement interval and that their performance is better than that of domestic investors particularly for a longer investment horizon.
foreign investors,extrapolative expectations,temporary component in stock price,stock index futures
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