Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea

International Review of Finance, 2016

Posted: 10 Jan 2015 Last revised: 16 Aug 2017

See all articles by Lingxia Sun

Lingxia Sun

Sun Yat-sen University (SYSU) - ISBF; Nankai University - Business School; Korea University Business School (KUBS)

Dong Wook Lee

Korea University

Multiple version iconThere are 2 versions of this paper

Date Written: November 11, 2016

Abstract

In this paper, we examine the factor exposures of foreign equity capital in a domestic stock market in order to understand its risk-taking behavior and sources of returns in the market. Using data from Korea for the 1999-2013 period, we find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor, which is long on low-IVOL stocks and short on high-IVOL stocks. That is, foreign equity capital is typically allocated to low-IVOL stocks and profits from the return differential between low- and high-IVOL stocks. We also find that foreign equity capital moves in a way that it is loaded more on the IVOL factor when the IVOL factor premium is larger. We discuss the comparative advantage of foreign equity capital in bearing the IVOL factor risk and the role of information asymmetry between locals and foreigners in this risk sharing. We also provide additional empirical results that support our interpretation.

Keywords: Foreign investors, Factor loadings, Idiosyncratic volatility, Korea

JEL Classification: F30, G11, G15

Suggested Citation

Sun, Lingxia and Lee, Dong Wook, Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea (November 11, 2016). International Review of Finance, 2016, Available at SSRN: https://ssrn.com/abstract=2547350

Lingxia Sun

Sun Yat-sen University (SYSU) - ISBF ( email )

Tangjiawan, Zhuhai Campus
Zhuhai, Guangdong 519082
China

Nankai University - Business School ( email )

94 Weijin Road, Nankai District
Tianjin, 300071
China

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Dong Wook Lee (Contact Author)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

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