Foreign Equity Investors and Momentum Profits: Evidence from Korea

This paper examines the trading behavior of foreigner equity investors and its impact on momentum profits. The Korean stock market makes a good setting for this study because of its openness to foreign investors and the availability of a rich dataset that records foreignners’ holdings and trading of each individual stock on a daily basis. Following Grinblatt and Keloharju (2000)’s methodologies, we find strong evidence of positive feedback trading by foreign investors for the period of 1999~2014. We also find that momentum profits are more pronounced among stocks that undergo bigger increases of foreigners’ holdings. In addition, the big magnitude of momentum profits conditional on increases of foreigners’ holdings is not affected by stocks’ attributes, such as market capitalization, book-to-market ratio, beta, and turnover ratio. In our robustness checks, we construct momentum portfolios based on firm-specific returns and also observe significant firm-specific momentum profits for those stocks incurring increases in foreigners’ holdings. Finally, we offer both risk- and behavior- based interpretations for our findings.