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Behavior of foreign investors in the Malaysian stock market in times of crisis: A nonlinear approach

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  • Omay, Tolga
  • Iren, Perihan

Abstract

This study investigates the response to crisis of foreign investors versus domestic investors in the Malaysian stock market. The econometric-modeling involves a nonlinear approach which allows for investor responses to differ in up and down markets. Specifically, the smooth-transition autoregressive (STAR-STGARCH) family of models and generalized impulse response function (GIRF) analysis are employed. The 1997 Asian Crisis is analyzed using daily data for the period 1995–2003, and the 2008 Global Financial Crisis for a period extended to 2015 with allowance for structural breaks. The results indicate that foreign investors exhibited herding behavior during the Asian Crisis and responded to the shock more quickly than domestic investors, but that foreigners did not act differently from their domestic counterparts during the Global Financial Crisis. These findings suggest that even as foreign capital flows may be desirable for economic growth, they can be unstable and may increase volatility during crises that are locally rooted.

Suggested Citation

  • Omay, Tolga & Iren, Perihan, 2019. "Behavior of foreign investors in the Malaysian stock market in times of crisis: A nonlinear approach," Journal of Asian Economics, Elsevier, vol. 60(C), pages 85-100.
    • Handle: RePEc:eee:asieco:v:60:y:2019:i:c:p:85-100
    DOI: 10.1016/j.asieco.2018.11.002
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    2. Choijil, Enkhbayar & Méndez, Christian Espinosa & Wong, Wing-Keung & Vieito, João Paulo & Batmunkh, Munkh-Ulzii, 2022. "Thirty years of herd behavior in financial markets: A bibliometric analysis," Research in International Business and Finance, Elsevier, vol. 59(C).
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    More about this item

    Keywords

    STAR-STGARCH; Generalized impulse response function; 1997 Asian crisis; 2008 global financial crisis; Malaysian stock exchange; Foreign investors;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G1 - Financial Economics - - General Financial Markets

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