Offshore Investment Funds: Monsters in Emerging Markets?

HKIMR Working Paper No. 05/2001

31 Pages Posted: 27 Aug 2007

See all articles by Woochan Kim

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Multiple version iconThere are 3 versions of this paper

Date Written: May 2001

Abstract

The 1997-99 financial crises in the emerging markets have brought to the foreground the concern about offshore investment funds and their possible role in exacerbating financial market volatility. Offshore investment funds are alleged to engage in trading behaviors that are different from their onshore counterparts. Because they are less moderated by tax consequences, and are subject to less supervision and regulation, the offshore funds may trade more intensely. They could also engage more aggressively in certain trading patterns such as positive feedback trading or herding that could contribute to greater market volatility. Using a unique data set, we compare the trading behavior of offshore funds in Korea with that of three sets of onshore funds as control groups. There are a number of interesting findings. First, the offshore funds do trade more intensely than their onshore counterparts. Second, however, the offshore funds do not engage in positive feedback trading in a significant way. In contrast, there is strong evidence that the onshore funds from the U.S. and U.K. do engage in positive feedback trading. Third, while offshore funds herd, they did so significantly less than the onshore funds during the crisis. In sum, the offshore funds are not especially worrisome monsters.

Keywords: offshore funds, foreign investment, crisis, feedback trading, herding

Suggested Citation

Kim, Woochan and Wei, Shang-Jin, Offshore Investment Funds: Monsters in Emerging Markets? (May 2001). HKIMR Working Paper No. 05/2001. Available at SSRN: https://ssrn.com/abstract=1009446 or http://dx.doi.org/10.2139/ssrn.1009446

Woochan Kim (Contact Author)

Korea University Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Asian Institute of Corporate Governance (AICG) ( email )

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Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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