Behavior and Effects of Foreign Investors on Istanbul Stock Exchange
24 Pages Posted: 29 Jan 2005
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: Suggested Citation