How Do Foreigners Profit from Local Investors? Evidence from Trades in the Japanese Stock Market

43 Pages Posted: 12 Sep 2001

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Keiichi Ito

Nomura Holdings, Inc. (NHI) - Nomura Securities Co., Ltd.

Takeshi Yamada

Australian National University (ANU)

Date Written: May 2002

Abstract

Using data on trading across the entire Tokyo Stock Exchange, we examine the trade interactions of various investor types. Since buy trades must be cleared by the sell trades of other investors, we relate the trade interactions of various investor groups to the relative trading cost and timing among different investor groups. The interaction between foreign investors and domestic financial institutions represents one of the most important patterns of interactions during the 1990s. We find that foreign investors tend to profit from domestic institutional investors. In particular, domestic institutions sell shares to realize capital gains on their portfolio holdings near the fiscal year-end. Because of this practice, domestic institutions' investment timing is hampered and the cost of trading increases. Foreigners exploit this opportunity since they need not follow the Japanese corporate accounting rules.

Keywords: Investor behavior, Momentum, Foreign investors, Performance

JEL Classification: G10, G15, G18

Suggested Citation

Bae, Kee-Hong and Ito, Keiichi and Yamada, Takeshi, How Do Foreigners Profit from Local Investors? Evidence from Trades in the Japanese Stock Market (May 2002). Available at SSRN: https://ssrn.com/abstract=283184 or http://dx.doi.org/10.2139/ssrn.283184

Kee-Hong Bae

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Keiichi Ito

Nomura Holdings, Inc. (NHI) - Nomura Securities Co., Ltd. ( email )

Tokyo 100-8130
Japan

Takeshi Yamada (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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