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Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market

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  • Liao, Li-Chuan
  • Chou, Ray Yeutien
  • Chiu, Banghan

Abstract

On Taiwan's stock market, foreign institutional investors hold over one-third of the total market value and have enjoyed remarkable returns on their investments. Hence, it is important to investigate the trading behavior of foreign institutional investors. Previous studies have found that foreign institutional investors are momentum traders. This study documents a cognitive bias – anchoring effect – on foreign institutional investors’ trading decisions. Moreover, we document that foreign institutional investors’ momentum behavior is influenced (anchored) by prior foreign ownership (anchor). We also show that foreign investors’ momentum behavior is strengthened when prior foreign ownership is high. However, the anchoring effect cannot improve momentum profitability. In some cases, momentum profitability suffers because of the anchoring effect.

Suggested Citation

  • Liao, Li-Chuan & Chou, Ray Yeutien & Chiu, Banghan, 2013. "Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 72-91.
    • Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:72-91
    DOI: 10.1016/j.najef.2013.07.001
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    More about this item

    Keywords

    Anchoring effect; Foreign institutional investors; Foreign ownership; Momentum behavior; Momentum profitability;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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