Liquidity, Price Impact, and Foreign Trading: Does Identity Matter?

Abstract

This paper examines the price impact of liquidity demanding order flow. We define liquidity demand as trading in the direction of the daily price movement. We use Indonesian data on foreign and domestic order flow to examine whether the liquidity impact is different between foreign and domestic investors. Our findings show that foreign investors demand liquidity more aggressively than domestic investors and the price impact of foreign liquidity demand is significantly larger than domestic liquidity demand.

Keywords: Liquidity, Foreign Traders, Foreign Investors

JEL Classification: G12, G15