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Asian Review of Financial Research, Vol., No..
pp.275~307
pp.275~307
Can differential interpretation of common information explain the distinct stock holdings of foreign investors?
Hyung-Cheol Kang Respectively, Research Fellow, Korea Securities Research Institute
Dong Wook Lee Assistant Professor of Finance, Korea University Business School
Kyung-Suh Park Professor of Finance, Korea University Business School
This paper proposes and tests a symmetric information-based explanation for different stock holdings between domestic and foreign investors. Specifically, we extend Pastor (2000) and Li (2004) to the within-country stock selection problem by positing that domestic stocks are evaluated by investors through their own home-country market portfolio. This difference in ¡°model¡± allows locals and foreigners to interpret common information differently and build different opinions on domestic stocks, leading them to hold different domestic stock portfolios. Using data from Korea, we find strong evidence for this hypothesis. Additionally, we find that the differential interpretation of common information makes foreigners avoid some of the domestic stocks more than it increases the demand of foreign investors for other domestic stocks.
Hyung-Cheol Kang
Dong Wook Lee
Kyung-Suh Park
This paper proposes and tests a symmetric information-based explanation for different stock holdings between domestic and foreign investors. Specifically, we extend Pastor (2000) and Li (2004) to the within-country stock selection problem by positing that domestic stocks are evaluated by investors through their own home-country market portfolio. This difference in ¡°model¡± allows locals and foreigners to interpret common information differently and build different opinions on domestic stocks, leading them to hold different domestic stock portfolios. Using data from Korea, we find strong evidence for this hypothesis. Additionally, we find that the differential interpretation of common information makes foreigners avoid some of the domestic stocks more than it increases the demand of foreign investors for other domestic stocks.
Foreign investors,home bias,differential interpretation,asymmetric information