Foreigner investors and stock volatility: Evidence from Taiwan

Chia Jui Lai, Kuo Ren Lou, Cheng Yi Shiu

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


Financial authorities in many emerging markets often view foreign investors as enemies because foreign investors tend to cause excess volatilities and thus destabilize local markets. This paper studies the impact of foreign investors' trade on stock volatility in Taiwan's stock market. We collect daily foreign trade and stock return and turnover data at firm level from January 2000 to September 2006. Sample covers 20 firms of highest foreign ownership in Taiwan Stock Exchange. We employ the GJR-GARCH model to examine the impact of foreign trade on conditional volatility. The advantage of the GJR-GRACH model is its ability to capture asymmetric effects of good and bad news on conditional volatility. We find that foreigner's trade has a positive relation on concurrent return, and the trade of foreign investors increases conditional volatility. However, we argue that foreign investors play the role of price discovery by trading local stocks. When the prices of local stocks deviate from intrinsic value, foreign investors trade to push price back to equilibrium. Foreign investors improve the market efficiency by trading local stocks, accompanied by the facts that price adjustment increases local stock volatilities.

Original languageEnglish
Pages (from-to)315-328
Number of pages14
JournalInternational Journal of Information and Management Sciences
Issue number2
StatePublished - Jun 2008


  • Foreign investors
  • GARCH model
  • Volatilities


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