Bayesian analysis of time-varying interactions between stock returns and foreign equity flows

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Baba B., Sevil G.

FINANCIAL INNOVATION, vol.7, no.1, 2021 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 7 Issue: 1
  • Publication Date: 2021
  • Doi Number: 10.1186/s40854-021-00267-9
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Keywords: Stock returns, Net foreign equity flows, Time-varying parameter VAR, Feedback trading, Forecast ability, Economic policy uncertainty, ECONOMIC-POLICY UNCERTAINTY, TRADING BEHAVIOR, MARKET RETURNS, INDIVIDUAL INVESTORS, SIMULATION SMOOTHER, PORTFOLIO FLOWS, PRICE IMPACT, INVESTMENT, VOLATILITY, EXPERIENCE
  • Anadolu University Affiliated: Yes


This study discusses the trading behavior of foreign investors with respect to economic uncertainty in the South Korean stock market from a time-varying perspective. We employ a news-based measure of economic uncertainty along with the model of time-varying parameter vector autoregression with stochastic volatility. The empirical analysis reveals several new findings about foreign investors' trading behaviors. First, we find evidence that positive feedback trading often appears during periods of high economic uncertainty, whereas negative feedback trading is exclusively observable during periods of low economic uncertainty. Second, the foreign investors' feedback trading appears mostly to be well-timed and often leads the time-varying economic uncertainty except in periods of global crises. Third, lagged negative (positive) response of net flows to economic uncertainty is found to be coupled with lagged positive (negative) feedback trading. Fourth, the study documents an asymmetric response of foreign investors with regard to negative and positive shocks of economic uncertainty. Specifically, we find that they instantly turn to positive feedback trading after a negative contemporaneous response of net flows to shocks of economic uncertainty. In contrast, they move slowly toward negative feedback trading after a positive response of net flows to uncertainty shocks.