Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea
Posted: 29 Feb 2008 Last revised: 21 Dec 2010
Date Written: 2005
We investigate whether domestic investors have an edge over foreign investors in trading domestic stocks. Using Korean data, we show that foreign money managers pay more than domestic money managers when they buy and receive less when they sell for medium and large trades. The sample average daily trade-weighted disadvantage of foreign money managers is 21 basis points for purchases and 16 basis points for sales. There is also some evidence that domestic individual investors have an edge over foreign investors. The explanation for these results is that prices move more against foreign investors than against domestic investors before trades.
Keywords: Foreign investor, Trading edge, Information advantage, Permanent and temporary impact, volume-weighted average price
JEL Classification: G11, G15, G28
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