Behavior and Effects of Foreign Investors on Istanbul Stock Exchange

24 Pages Posted: 29 Jan 2005

See all articles by Can Adabag

Can Adabag

Bocconi University

Jose Renato Haas Ornelas

Banco Central do Brasil

Date Written: December 2004


This paper analyzes the effects of foreign investors on the Istanbul Stock Exchange (ISE), as well as their behavior when trading on the Turkish stock market. Using a VAR model with net foreign portfolio inflow and US Dollar returns of ISE as endogenous variables, we show that there is a monthly contemporaneous relationship between these variables, and therefore when foreign investors enter the Turkish market, the ISE index raises contemporaneously, and vice-versa. However, this cannot be considered as a long-run process of base broadening, since net foreign portfolio inflow and the first difference of Foreign Portfolio Holdings are stationary over the period analyzed. Evidence of negative feedback trading was found, suggesting that these investors adopt contrarian strategies when trading in the Turkish market. This behavior is not in line with the results of previous empirical studies, which either found no feedback trading, or evidence of positive feedback trading. Also, we found no price pressure effect created by foreign investors. We give robustness to our results through the use of control variables and different lag-structure specifications. Therefore, on the basis of our findings, foreign investors cannot be blamed for causing instability in Turkey. On the contrary, the negative feedback strategy tends to smooth market movements instead of exacerbating them. In this way, foreign equity investment seems to be beneficial to the Turkish stock market.

Keywords: Foreign investors, feedback trading, price pressure, base broadening

JEL Classification: F32, G14, O16

Suggested Citation

Adabag, Murat Can and Ornelas, Jose Renato Haas, Behavior and Effects of Foreign Investors on Istanbul Stock Exchange (December 2004). Available at SSRN: or

Murat Can Adabag

Bocconi University ( email )

Via Sarfatti 25
20136 Milan, MI 20136

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900


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