Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
This paper studies the trading behavior and performance of foreign investors with different management styles. The analysis uses a comprehensive Colombian data with complete transaction records and unique investor identification, and finds that the...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/937231489425579792/Do-foreign-investors-underperform-An-empirical-decomposition-into-style-and-flows http://hdl.handle.net/10986/26344 |
| Summary: | This paper studies the trading behavior
and performance of foreign investors with different
management styles. The analysis uses a comprehensive
Colombian data with complete transaction records and unique
investor identification, and finds that the aggregate
under-performance of foreign investors is attributable to
foreign passive funds, that is, those that replicate a
benchmark index. These funds pay higher prices to increase
the speed of their trades to accommodate daily flows
proportionally to their index before market closing. Passive
funds face higher transaction costs on days when they trade
multiple stocks in the same direction, buy (sell) the same
stock multiple times, and make large trades near the daily
closing time. Meanwhile, foreign active funds trade at more
favorable prices and display higher risk-adjusted returns
than any other investor group, including domestic funds with
similar active management. The findings highlight the
potential costs of index investing in developing countries
or in securities with low trading activity (small stocks). |
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