Geopolitical Risks and Foreign Institutional Investors: Evidence from the Taiwan Stock Market

Abstract

In this study, we examine the impact of geopolitical risks on the trading behavior of foreign institutional investors in the Taiwan stock market during the outbreak of the Russian-Ukrainian War. We use a cross-sectional analysis to demonstrate that the firms with greater exposure to the trading decisions of foreign institutional investors suffered larger losses, specifically-0.24, compared to those with less exposure on the event date. Moreover, greater exposure was associated with higher trading volumes, stock volatilities, and turnover ratios than those observed for control firms on the event date. Additionally, this effect becomes stronger for firms that are facing greater exposure that also have lower operating performances, higher risk factors, and higher market liquidity. Our findings thus have important implications for investors, practitioners, and academics.

Keywords: P16 Russian-Ukrainian War, Foreign Institutional Ownership, Geopolitical Risk, Stock Return, stock volatility