Abstract

This paper uncovers novel facts about trading behavior of non-residents in local financial markets and their impact on return dynamics and local investor trading, based on detailed regulatory order flow data in Thai foreign exchange, equity, and fixed income markets. First, foreign investors engage in positive feedback trading in all three asset classes, and their trading decisions resemble momentum trading rather than strong portfolio rebalancing activity between asset classes. Second, innovations to foreign investor order flow are informative of future returns, but the information is not based on local macro fundamentals. Third, local financial investors tend to mimic foreign investor trading, while non-financial investors consistently provide liq- uidity. Fourth, further tests suggest that the profitability of momentum trading is positively related to the amount of foreign capital flowing into the local financial market. Taken together, the results indicate that a significant presence of foreign investors can alter the trading behavior of local investors and can reduce the importance of local fundamentals in driving asset prices.

JEL Codes: F30, G11, G14, G15
Keywords: International financial markets, heterogeneous trading, disaggregated order flow, for- eign investors, emerging markets.