Bayesian analysis of time-varying interactions between stock returns and foreign equity flows

This study discusses the trading behavior of foreign investors with respect to economic uncertainty in the South Korean stock market from a time-varying perspective. We employ a news-based measure of economic uncertainty along with the model of time-varying parameter vector autoregression with stochastic volatility. The empirical analysis reveals several new findings about foreign investors’ trading behaviors. First, we find evidence that positive feedback trading often appears during periods of high economic uncertainty, whereas negative feedback trading is exclusively observable during periods of low economic uncertainty. Second, the foreign investors’ feedback trading appears mostly to be well-timed and often leads the time-varying economic uncertainty except in periods of global crises. Third, lagged negative (positive) response of net flows to economic uncertainty is found to be coupled with lagged positive (negative) feedback trading. Fourth, the study documents an asymmetric response of foreign investors with regard to negative and positive shocks of economic uncertainty. Specifically, we find that they instantly turn to positive feedback trading after a negative contemporaneous response of net flows to shocks of economic uncertainty. In contrast, they move slowly toward negative feedback trading after a positive response of net flows to uncertainty shocks.

Momentum Periods of Feedback Trading toward Exchange Rate Volatility

In this paper, the authors apply empirical evidence to demonstrate how important positive feedback trading factors in understanding exchange rate behavior. Utilizing the GARCH augmented feedback model, or the exchange rate model set out by Laopodis (2005), the author analyzes autocorrelation in exchange rate parameters and volatility in key ASEAN markets to yield the deeper understanding of momentum periods. The authors contend that positive feedback traders affect exchange rate volatility in ASEAN countries and induce the autocorrelation of negative returns within high exchange rate volatility. This study found that Singapore demonstrated a significant positive feedback trading during the period 1995-2014, while the authors further contend that Thailand, Indonesia, Malaysia, the Philippines, Brunei Darussalam, and Singapore also demonstrated positive feedback trading during the 1997-1998 Asian financial crisis. In addition to analyzing the positive feedback trading on exchange rate volatility, we also identify the exchange rate volatility spillover across the ASEAN countries. Related to this context, we found that Indonesia and Thailand play a dominant role as a dominant exchange rate volatility transmitter in the ASEAN region.