Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam

Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam

Accepted Manuscript Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam Xuan Vinh Vo PII: DOI: Reference: S...

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Accepted Manuscript Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam

Xuan Vinh Vo PII: DOI: Reference:

S1057-5219(17)30069-8 doi: 10.1016/j.irfa.2017.05.007 FINANA 1109

To appear in:

International Review of Financial Analysis

Received date: Revised date: Accepted date:

19 April 2017 ###REVISEDDATE### 23 May 2017

Please cite this article as: Xuan Vinh Vo , Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam, International Review of Financial Analysis (2017), doi: 10.1016/j.irfa.2017.05.007

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ACCEPTED MANUSCRIPT Trading of foreign investors and stock returns in an emerging market Evidence from Vietnam Xuan Vinh Vo University of Economics Ho Chi Minh City 59C Nguyen Dinh Chieu Street – District 3 – Ho Chi Minh City

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CFVG Ho Chi Minh City

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and

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91 Ba Thang Hai Street, District 10, Ho Chi Minh City Tel: (84 8) 38 551 776 - Fax: (84 8) 38 551 776

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Email: [email protected]

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Abstract

This article investigates the impact of foreign investors’ trading on stock returns in Vietnam, a key

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emerging market. We utilize a time series data set of foreign investors’ trading volume and market

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returns of the Ho Chi Minh City stock exchange over an extended time frame before and after global financial crisis. The results indicate that foreign investors are positive feedback traders in

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Vietnam stock market. The findings also reveal the timing ability and trading strategy of foreign

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investors. The paper offers strong implications for market participants and portfolio investment.

Keywords: feedback traders, foreign investors, trading, stock returns, emerging markets, Vietnam JEL Classification: G10, G20, G24, G32, G35

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Introduction

The increased trend of international financial integration and financial liberalization worldwide significantly facilitates a significant increase in foreign portfolio investment in emerging markets.

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Foreign investors also play an important role in the restructuring process of local equity markets.

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Moreover, foreign investors gradually shift their investment portfolio to emerging markets for

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international risk sharing and diversification benefits. As a result, foreign investors’ trading and its impacts on emerging equity markets have been the focal point of research in the current

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literature.

Trading of foreign investors is likely to have a strong impact on domestic equity market because

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of several reasons. First of all, foreign investors normally trade in large volume because of their

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large holdings relatively to small size of emerging markets. Further, foreign investors tend to follow each other to buy or to sell a stock (herding) and this might potentially have a strong impact

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on stock prices. In addition, trade of foreign investors tends to have an even more critical effect in

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emerging markets since foreign investors are sophisticated investors from advanced economies

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and strong experience in financial markets.

Previous studies generally confirm advantage of foreign investors over local investors in emerging markets. For example, Kamesaka et al. (2003) argue that foreign investors are normally in the best performance group of investors. In addition, Kang et al. (2016) assert that foreign investors are in more advantageous position over local investors with respect to global information and thus their trades have more information. Lim et al. (2016) confirm that foreign investors accelerate the incorporation of information into stock prices. However, other authors claim that short-term 2

ACCEPTED MANUSCRIPT speculative trading behavior of foreign investors are the main causes of the financial instability and financial crisis in emerging equity markets (Samarakoon 2009). More importantly, the sudden reversal of foreign capital flows is considered as the main cause for financial crisis in emerging economies (Ahmed 2017). In the same vein, Bae et al. (2011) assert that there has been contentious

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discussion about the role of foreign portfolio investment and foreign investors in emerging markets.

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This background highlights the importance for a clear understanding of the trading behavior of

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foreign investors in emerging markets.

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This paper investigates the relationship between the trading of foreign investors and stock returns

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in the context of an emerging market. More specially, we explore the link between foreign investors’ trading and stock returns in Vietnam using a time series dataset of foreign investors’

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trading volume and market returns of the Ho Chi Minh City stock exchange over the period 2006-

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2015. In other words, we attempt to shed further light on how foreign equity flows relate to past and future stock return and whether foreign investors’ trading information is relevant to predict

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stock returns.

The unique characteristics of foreign investors in Vietnam stock market offer an interesting setting

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and motivation for this paper. Even though there is a number of recent papers document the financial developments (Vo 2016a) and impacts of foreign investors on corporate decisions and stock market in Vietnam (Batten & Vo 2015; Vo 2015, 2016b, 2016c), several distinct features of the Vietnamese context are important. We briefly summarize some salient features of foreign investors in Vietnam stock market as follows. Prior 1/9/2015, foreign investors in Vietnam are subject to a cap of maximum 49% ownership in Vietnamese listed firms. As an important part of

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ACCEPTED MANUSCRIPT the stock market restructuring program, Vietnam lifts the cap on foreign ownership on public listed firms with the issuance of the Decree No. 60/2015/ND-CP on 26 June 2015. This is an important feature of Vietnam stock market since foreign investors could take a majority ownership or wholly own a public firms in a huge potential market. More specially, this long-anticipated change in the

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law presents a range of new investment opportunities for foreign investors in Vietnam and

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increases the attraction of the Vietnamese stock markets as a source for investment and liquidity1.

Continuous improvement and restructure of the equity market is an important outcome of the

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comprehensive reform package initiated by the Vietnamese government. The Ho Chi Minh City

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stock exchange is the first centralized exchange in Vietnam which is established in July 2000. Since the inauguration, the stock market gradually develops and it is now becoming an important

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equity market in Asia. More importantly, Vietnamese government sets the priority to develop the

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stock market to international standard, with the strong objective of building an effective and longterm capital mobilization channel for economic development. As a result, Vietnam securities

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and all over the world.

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market gradually achieves developments to the level of other advanced markets within the region

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The role of foreign investors in emerging markets in general and in Vietnam stock market in particular also strongly motivates this article. Clearly, foreign investors play an important role in emerging markets since they are normally equipped by sophisticated investment technique. Moreover, foreign investors investing in Vietnam are mainly institutional investors with larger size

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http://www.allenovery.com/publications/en-gb/Pages/Vietnam-lifts-the-cap-on-foreign-ownership-of-publiccompanies.aspx

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ACCEPTED MANUSCRIPT and having strong experience in financial markets. Vietnamese government considers increasing participation of foreign investors as an important reform feature for the equity market.

Another motivation for the paper is the extant literature on the relationship between trading volume

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and stock returns (Lee & Rui 2002). Trading volume is an important indicator for market

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participants since it is presumably incorporated future stock price movement (Karpoff 1986;

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Llorente et al. 2002). Moreover, investigating the joint dynamics of trading volume and stock returns provides more information than analyzing the univariate dynamics of stock prices (Chen

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et al. 2001). However, the literature on trading volume of foreign investors seems to be light and

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more importantly, the topic of trading impacts of foreign investors remains unexplored. Meanwhile, trading of foreign investors is more critical in emerging markets since these investors are

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sophisticated investors and their trading is assumed to incorporate information.

Most of previous studies confirm a strong contemporaneous relationship between trading of

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foreign investors and stock returns. However, the direction of causality remains open in the current

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literature. This highlights the importance for further research into this topic. Moreover, most of previous work seem to focus on the contemporaneous relationship between trading volume and

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stock returns (Amihud 2002; Gallant et al. 1992; Karpoff 1987). It is also important to test the lead lag relationship among these variables.

Further, the long-term and short-term effects of foreign investors’ trading seem to be mixed in the current literature. Studies use data of different countries yield different results. For example, Vo (2015) confirms the long-term stabilizing effects of foreign investors in Vietnam stock market

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ACCEPTED MANUSCRIPT while Umutlu & Shackleton (2015) report an increasing impact of foreign investors’ trading on stock return volatility in Korean stock market. These conflicting results highlight the importance of further work in order to provide a better understanding of foreign investors’ behavior in

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emerging stock markets.

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Another important motivation is from the rise in importance of emerging equity markets. To this

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end, it is generally accepted that emerging markets continue to be an important destination for foreign investors. Specially, it is evident that global portfolio managers tend to shift their portfolios

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into emerging market for higher returns. This is also coupled with the fact that emerging economies

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have been growing at a rapid pace over the last three decades (Atilgan et al. 2015). Moreover,

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emerging markets offer not only return enhancement but also risk-reduction (Buchanan et al. 2011).

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The current paper offers a number of contributions to the literature. Our first contribution lies with the short-term effect of foreign investors’ trading activities on stock prices in emerging economies.

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Much work has been focused on the long run impacts of foreign investors. However, the short-

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term impacts of foreign investors’ trading seem to be light in the current literature. In addition, there is still a very light volume of literature addressing the trading behavior of foreign investors

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in emerging economies. Secondly, we contribute to the current literature by allowing for a system of equations. We also allow for the inclusion of lag returns in the regression models. More importantly, this paper is among the first to investigate the impact of foreign investors’ trading on stock returns in Vietnam stock market. Thirdly, we explore the link between foreign investors’ trading and stock returns in a dynamic context. This paper also captures the features outlined by

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ACCEPTED MANUSCRIPT Albuquerque et al. (2007), which includes the contemporaneous correlation between foreign investors’ trading and current and expected returns.

Our main findings are as follows. Firstly, we find that foreign investors are positive feedback

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traders in Vietnam stock market. Secondly, we find an interesting evidence showing timing ability

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of foreign investors. More specially, we find a negative link between purchase of foreign investors

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and stock returns and a positive relation between the sale of foreign investors and subsequent stock

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returns.

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The current paper has strong practical implications. Firstly, a thorough understanding of trading behavior of foreign investors is important for market participants and portfolio investment (Lo &

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Wang 2000). Secondly, trading of foreign investors has significant impact on stock prices in

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emerging equity markets. More importantly, if foreign investors react to information simultaneously, they may destabilize stock prices. Further, in line with previous outcome that

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trading of foreign investors plays an important role in explaining comovement in international

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equity prices (Bartram et al. 2015), the paper highlights potential benefits for international

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portfolio diversification.

The remainder of the paper is outlined as follows. Section two reviews the literature concerning the relationship between the trading of foreign investors and stock returns. Section three introduces the method and data for the empirical analysis. Section four presents and discusses the results. Finally, section five concludes the paper.

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ACCEPTED MANUSCRIPT 2.

Literature Review

The role of foreign investors has been an important topic in the literature. In the perspectives of emerging markets, foreign investors are normally considered as sophisticated investors with well-

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equipped monitoring techniques. A huge volume of papers analyze the impact of trading behavior

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of different types of investors on stock prices. Moreover, price and volume relationships are

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reported in previous studies to be instrumental in the assessment of their combined impact on stock market volatility (Chakraborty & Kakani 2016). In addition, previous studies suggest that the

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existence of information asymmetry between foreign and domestic investors leads to the positive

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correlation between foreign investors flow and stock returns of domestic markets (Brennan & Cao

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1997; Brennan et al. 2005).

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In the same vein, a large number of papers have been devoted to investigation of foreign investors in emerging markets. For example, the role of foreign investors has been considered from different

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perspectives in a number of studies. These studies report strong impacts of foreign investors on

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other stock variables in emerging markets. For example, Chung et al. (2016) analyzes the impact of foreign investors on information asymmetry and Peranginangin et al. (2016) investigate the

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liquidity effect of foreign investors.

With respect to trading behavior of foreign investors, an important strand of research in the current literature on trading of foreign investors is the question of whether foreign investors are positive feedback traders (Samarakoon 2009; Ülkü & İkizlerli 2012; Ülkü & Weber 2013). More particularly, this line of studies focuses on whether foreign investors buy after stock price increases

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ACCEPTED MANUSCRIPT and sell after stock prices declines. Evidence of positive feedback trading is reported in many papers using different data frequency. For example, Jeon & Moffett (2010) provide evidence of a significant impact of foreign investors’ trading on stock returns in Korean stock market in addition to positive feedback trading by foreign investors at the annual frequency. A number of papers

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provide evidence using higher frequency data, for example, quarterly data (Brennan & Cao 1997),

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monthly data (Bekaert et al. 2002; Dahlquist & Robertsson 2004), weekly data (Kamesaka et al.

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2003; Karolyi 2002). More importantly, Ülkü & İkizlerli (2012) assert that a huge volume of papers present evidence of a significant positive association between current foreign flows and

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lagged domestic stock market returns using daily data (Choe et al. 1999; Froot & Ramadorai 2001;

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Griffin et al. 2004; Kim et al. 2009; Richards 2005). The feedback trading behavior of foreign investors is normally attributed to the information asymmetry between foreign and local investors

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(Dvořák 2005). In addition, Froot et al. (2001) suggest that the positive trading behavior of foreign

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investors might be because foreign investors use past returns to extract information about future

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returns.

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On the other hand, a few number of papers suggest the contrarian behavior by foreign investors in domestic equity markets. For example, Choe et al. (1999) report the evidence that foreign investors

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are contrarian traders in their sell trades during the Korean financial crisis. Kim & Wei (2002) argue that foreign institutional investors in Korean equity market are contrarian traders before the crisis. However, they are becoming positive feedback traders during the Korean crisis (Samarakoon 2009). Further, Ülkü (2015) offer evidence of foreign investors’ negative feedback trading with respect to returns at longer horizons. Porras & Ülkü (2015) document that foreign

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ACCEPTED MANUSCRIPT investors, especially US investors expose to foreign exchange risk in Spain, display market-wide negative feedback trading.

Another line of research addresses the impact of foreign investors’ trading on local stock returns

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(Ülkü & İkizlerli 2012). Previous results seem to be intriguing since a large number of papers

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report a positive contemporaneous link between foreign investors’ net buying and local stock

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returns. Many arguments are provided as explanations for this interesting result. For example, Brennan & Cao (1997) and Griffin et al. (2004) suggest that foreign investors have cumulative

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information disadvantage because they do not have much information acquired in the previous

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period. Dvořák (2003) argue that foreign investors have marginal information advantage due to their advantage in collecting information in the current period. Moreover, Dvořák (2005)

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concludes that foreign investors possess superior expertise but lack local information. To this end,

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Leuz et al. (2010) assert that foreign investors tend to invest in firms with good corporate governance practices and information environment. Ülkü & İkizlerli (2012) also note that trading

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of foreign investors might not be correlated with information but associated with large price impact.

A number of papers investigate different aspects of foreign investors in Vietnam stock market from

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different angles. For example, Batten & Vo (2015) examine the preference of foreign investors while Vo (2015) considers the role of foreign investors in stabilizing stock return volatility. This paper fundamentally differentiates from previous studies in the sense that we focus on analyzing the short-term behavior of foreign investors’ trading and their impacts on stock returns. More specially, this paper focuses on analyzing the link between trade of foreign investors and stock returns using a dynamic setting.

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3.

Data and Methods

Data for this study are collected from the Bloomberg database. Our data include the total volume of foreign investors’ trading, the total purchases of foreign investors, and the total sales of foreign

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investors in daily frequency for all stocks in the Ho Chi Minh City stock exchange. We also utilize

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the daily returns of the stock index (the VNIndex). Our data cover the period from 1/1/2006 to

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31/12/2015 which provides comprehensive insights since this time span cover the global financial

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crisis.

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We start by analyzing the relationship between foreign trading and stock returns by estimating bivariate vector autoregressive (VAR) models. The use of VAR models offers several advantages.

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Firstly, VAR framework has been a standard in this line of research. Moreover, this approach is

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particularly relevant in investigating the relationship between foreign investors’ trading and stock

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returns in emerging markets (Ülkü 2015).

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We estimate the following equations to explore the impact of previous returns on future foreign investors’ trading (equation 1) and the impact of previous and contemporaneous foreign investors’

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trading on future stock returns (equation 2).

Trading equation: 𝐹𝑡𝑟𝑎𝑑𝑒𝑡 = 𝛼0 + ∑3𝑗=1 𝛼1𝑗 𝐹𝑡𝑟𝑎𝑑𝑒𝑡−𝑗 + ∑3𝑗=1 𝛼2𝑗 𝑅𝑒𝑡𝑢𝑟𝑛𝑡−𝑗 + 𝜀1𝑡

(1)

Return equation: 𝑅𝑒𝑡𝑢𝑟𝑛𝑡 = 𝛽0 + ∑3𝑗=0 𝛽1𝑗 𝐹𝑡𝑟𝑎𝑑𝑒𝑡−𝑗 + ∑3𝑗=1 𝛽2𝑗 𝑅𝑒𝑡𝑢𝑟𝑛𝑡−𝑗 + 𝜀2𝑡

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(2)

ACCEPTED MANUSCRIPT where Ftradet is the logarithm of total trading volume of foreign investors in the Ho Chi Minh City stock exchange in day t. Returnt is the stock return in day t, which is calculated as the difference in log of the stock price index (the VNIndex), 𝜀1𝑡 and 𝜀2𝑡 are the error terms.

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The trading equation (Equation 1) allows us to assess whether past returns affect future foreign

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investor trading. In this equation, we are interested in the coefficients on Returnt−j, where j = 1 to

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3, which would reveal whether trading of foreign investors is determined by past returns. The

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inclusion of the lagged variable representing trading of foreign investors, Ftradet−j, where j = 1 to 3, allows us to control for information about future foreign investors’ trading contained in past

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foreign investors’ trading. Moreover, we also use the F-test of the joint significance of the slope

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coefficients of the lagged return variables to understand whether past returns affect future equity

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flows.

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The return equation (equation 2) allows us to assess whether previous and contemporaneous foreign investors’ trading affect future returns. In this equation, the primary interest is the

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coefficient on Ftradet−j, where j = 0 to 3. We include the contemporaneous variable of foreign

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investors’ trading to control for the potential price pressure effect of the concurrent trading of foreign investors on stock returns. Moreover, similar to Samarakoon (2009), we control for information contained in lagged returns by allowing up to three lags as explanatory variables, Returnt−j, where j = 1 to 3.

Further, in order to simultaneously address the bidirectional causal relationship between trading of foreign investors and stock returns, we estimate a VAR system of equations. This framework is 12

ACCEPTED MANUSCRIPT suggested by Hasbrouck (1991) to model the bilateral interaction between trading and returns. In addition, this approach is useful in separating temporary and permanent price effects induced by foreign investors (Ülkü & İkizlerli 2012). More specially, we simultaneously estimate the following system of equations: 𝐹𝑡𝑟𝑎𝑑𝑒𝑡 = 𝛼0 + ∑3𝑗=1 𝛼1𝑗 𝐹𝑡𝑟𝑎𝑑𝑒𝑡−𝑗 + ∑3𝑗=1 𝛼2𝑗 𝑅𝑒𝑡𝑢𝑟𝑛𝑡−𝑗 + 𝜀1𝑡

Results and Discussion of Results

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4.

(4)

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𝑅𝑒𝑡𝑢𝑟𝑛𝑡 = 𝛽0 + ∑3𝑗=0 𝛽1𝑗 𝐹𝑡𝑟𝑎𝑑𝑒𝑡−𝑗 + ∑3𝑗=1 𝛽2𝑗 𝑅𝑒𝑡𝑢𝑟𝑛𝑡−𝑗 + 𝜀2𝑡

(3)

In order to estimate the VAR model, it is necessary that we check whether the series employed in

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the analysis are stationary. We employing the Augmented Dickey-Fuller test and use the Schwarz

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Information Criterion to determine the appropriate lag length in the unit root tests.

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< INSERT TABLE 1 ABOUT HERE>

Results from table 1 indicate rejection of the hypotheses that these series have a unit root at the 1%

4.1.

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level of significance. In other words, all of the series are stationary.

Do past returns predict future foreign investors’ trading?

Table 2 represents the coefficient estimates in regressions of trading of foreign investors on past returns. The specification of this model allows us to assess whether past returns could be used to predict future trading of foreign investors, controlling for the effects of past foreign investors’ trading. The results in this table include the estimates of three types of foreign investors’ trading:

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ACCEPTED MANUSCRIPT the total/gross foreign investors’ trading (purchases + sales), the purchases of foreign investors and the sales of foreign investors.

The results in this table offer important insights into the prediction of foreign investors’ trading.

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Obviously, it is interesting to observe that the past stock returns variable at the first lag significantly

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explains foreign investors’ trading. We also note that the past returns variables are only significant

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at the most recent lag, Returnt−1, and they are not significant with longer lags. This result is

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intriguingly in line with previous finding of Samarakoon (2009) in Sri Lankan market.

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Particularly, we find that the coefficients for the past returns variable at the first lag are positive in regressions explaining gross foreign investors’ trading and purchases of foreign investors. Further,

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this is negative in regressions explaining sales of foreign investors. This suggests that foreign

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investors act as positive feedback traders in Vietnam stock market.

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The F-tests of joint significance in predicting future foreign investors’ trading are reported at the

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bottom of the table. Obviously, these tests show that past stock returns are jointly significant at the 1% level in explaining total foreign investors’ trading, purchases of foreign investors and sales of

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foreign investors after controlling for the past foreign investors’ trading.

< INSERT TABLE 2 ABOUT HERE>

4.2.

Does past trading of foreign investors predict returns?

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ACCEPTED MANUSCRIPT Table 3 reports the estimates of regressions of the relationship between past foreign investors’ trading and stock returns. In this model, the coefficients on the lagged variable of foreign investors’ trading suggest whether trading affects future stock returns after controlling for past returns and

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contemporaneous trading.

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The results reveal some important insights. Firstly, we find that concurrent purchases of foreign

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investors negatively and significantly influence stock returns while concurrent sales of foreign investors positively and significantly affect stock returns. This is an interesting result revealing the

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timing ability of foreign investors. More importantly, the distinguished price impact between buy

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and sell is a unique characteristic of foreign investors in Vietnam stock market. Secondly, the estimated results indicate that coefficients for the lagged variables are mixed with respect to sign

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and significance level. Hence, we do not find a consistent effect of past trading on future stock

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returns. Finally, we find the coefficients for the past returns in the first lag positively and significantly influence stock returns. This shows the persistence in equity returns in Vietnam stock

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market.

The F-tests of joint significance in predicting future stock returns are reported at the two bottom

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rows of the table. Similar to previous results on predicting trading of foreign investors, these tests show that past and concurrent foreign investors’ trading and past stock returns are jointly significant at the 1% level in explaining future stock returns.



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ACCEPTED MANUSCRIPT 4.3. Estimates of the system of VAR equations

Table 4 reports the estimates of the system of equations. Overall, these estimates confirm the regression results in previous section. We find that the coefficients of the past returns variable in

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the first lag are positive and significant in explaining trading of foreign investors. This confirms

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the positive feedback trading behavior of foreign investors in Vietnam stock market. Moreover,

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we also document the significant price impact of foreign investors’ trading in Vietnam stock market. These results offer interesting insights into trading of foreign investors in emerging stock

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markets. For example, we find that the purchases of foreign investors are negatively and

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significantly correlated with stock returns. We also observe that concurrent sales of foreign

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timing ability of foreign investors.

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investors are positively and significantly related to stock returns. These results clearly reveal the

Conclusions

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5.

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Previous literature shows that stock trading volume is considered to be one of the important factors representing timing of information arrival (Chakraborty & Kakani 2016). The importance of trading has been highlighted in many papers using advanced country data and context. Moreover, there is a strong link between trading volume and stock returns in the sense that volume tends to create positive excess return when the size of volume is high and a negative excess return when volume is low (Gervais et al. 2001).

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The relationship between trading of foreign investors and stock returns is an interesting topic in finance. There is strong interest from many authors resulting in a huge literature concerning this nexus. However, most of previous studies use data from advanced countries while the literature is

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relatively light in the context of emerging markets. Specially, the link between foreign investors’

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light into this issue in the context of emerging markets.

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trading and stock returns in Vietnam stock market remains unexplored. This paper sheds further

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The impact of foreign investors’ trading is pronounced in emerging markets due to several reasons.

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Firstly, foreign investors in these markets tend to be sophisticated investors with strong investment experience and management skills. Secondly, the size of foreign investors exposure in emerging

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markets tend to be large relatively to the size of local market so that their trades are expect to affect

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stock returns. Consequentially, further work is important to thoroughly examine the trading behavior of foreign investors and its impacts on the local equity markets, although the link between

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foreign investors’ trading and stock price fluctuation has been the core of much research and

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discussion in the current literature (Ahmed 2017).

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To fill the gap of the extant literature, this paper analyzes the relationship between foreign investors’ trading and stock returns in Vietnam, an important emerging market. Employing dynamic VAR system estimation, the results reveal some interesting results. Firstly, we document that foreign investors are positive feedback traders in Vietnam stock market. Secondly, the findings that concurrent price impact is negative in case of purchase of foreign investors and positive in case of sales of foreign investors highlight the timing ability and sophisticated trading strategy of foreign

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ACCEPTED MANUSCRIPT investors. The findings have strong implications for international diversification and portfolio investment.

References

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20

ACCEPTED MANUSCRIPT Table 1 Results of Unit Root Tests

Variable

ADF t-statistics

Prob.

-4.4377***

0.0003

-4.9136***

0.0000

-6.1777***

0.0000

Ftrade Fbuy

T

Fsell

IP

Return -39.0786***

0.0000

Table 2 Regression of Trading of Foreign investors on Past Returns

Investors

0.0000 0.0000 0.0000 0.0000 0.0013 0.6127 0.2032

M

0.9988*** 0.4790*** 0.2373*** 0.2181*** 2.1798*** 0.3550 -0.8653 1636.0340

Investors

PT

ED

C Ftrade(-1) Ftrade(-2) Ftrade(-3) Return(-1) Return(-2) Return(-3) F-statistic

Purchases of Foreign

AN

Gross Trading of Foreign

Prob(F-statistic)

US

CR

Note: *** indicates rejection at the 1% level.

0.0000

1.1413*** 0.5039*** 0.2256*** 0.1922*** 4.9681*** 1.6844** -2.0113 1353.6240 0.0000

Sales of Foreign Investors

0.0000 0.0000 0.0000 0.0000 0.0000 0.0270 0.0065

1.0359*** 0.4709*** 0.2117*** 0.2450*** -2.2411** -0.6098 0.7032 1453.0330 0.0000

AC

CE

Note: *, **, and *** indicate significance at the 10%, 5% and 1% level, respectively

21

0.0000 0.0000 0.0000 0.0000 0.0107 0.5016 0.4240

ACCEPTED MANUSCRIPT Table 3 Regression of Returns on Past Foreign Investors’ Trading

Gross Trading of Foreign

Purchases of Foreign

Sales of Foreign

Investors

Investors

Investors

0.0023 -0.0024*** 0.0025*** -0.0012* 0.0010* 0.2696*** -0.0415* 0.0364* 25.9570 0.0000

0.5920 0.0000 0.0001 0.0709 0.0866 0.0000 0.0553 0.0831

0.0012 0.0027*** -0.0004 -0.0016*** -0.0009* 0.2541*** -0.0289 0.0328 27.9534 0.0000

T

0.6304 0.8331 0.0186 0.0074 0.7252 0.0000 0.0651 0.0698

IP

0.0021 -0.0001 0.0016** -0.0018*** 0.0002 0.2544*** -0.0394* 0.0376* 23.5312 0.0000

CR

C Ftrade Ftrade(-1) Ftrade(-2) Ftrade(-3) Return(-1) Return(-2) Return(-3) F-statistic Prob(F-statistic)

AC

CE

PT

ED

M

AN

US

Note: *, **, and *** indicate significance at the 10%, 5% and 1% level, respectively

22

0.7256 0.0000 0.4988 0.0033 0.0616 0.0000 0.1752 0.1123

ACCEPTED MANUSCRIPT Table 4 Estimates of the VAR system of equations Gross Trading of Foreign Investors

C Ftrade Ftrade(-1) Ftrade(-2) Ftrade(-3) Return(-1) Return(-2) Return(-3)

Trading 0.9988***

0.0000

0.4790*** 0.2373*** 0.2181*** 2.1798*** 0.3550 -0.8653

0.0000 0.0000 0.0000 0.0013 0.6126 0.2032

Returns 0.0021 -0.0001 0.0016** -0.0018*** 0.0002 0.2544*** -0.0394 0.0376*

Purchases of Foreign Investors

0.6303 0.8331 0.0186 0.0073 0.7252 0.0000 0.0650 0.0697

Trading 1.1413*** 0.5039*** 0.2256*** 0.1922*** 4.9681*** 1.6844** -2.0113***

0.0000 0.0000 0.0000 0.0000 0.0000 0.0269 0.0064

Returns 0.0023 -0.0024*** 0.0025*** -0.0012* 0.0010* 0.2696*** -0.0415* 0.0364*

U N

D E

M

T P

E C

C A

23

0.5919 0.0000 0.0001 0.0708 0.0865 0.0000 0.0552 0.0830

Trading 1.0359***

T P

I R

C S

Note: *, **, and *** indicate significance at the 10%, 5% and 1% level, respectively

A

Sales of Foreign Investors

0.4709*** 0.2117*** 0.2450*** -2.2411** -0.6098 0.7032

0.0000 0.0000 0.0000 0.0000 0.0107 0.5016 0.4239

Returns 0.0012 0.0027*** -0.0004 -0.0016*** -0.0009* 0.2541*** -0.0289 0.0328

0.7256 0.0000 0.4987 0.0033 0.0616 0.0000 0.1752 0.1122