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Foreign institutions, local investors and momentum trading

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  • Bradrania, Reza
  • Wu, Winston

Abstract

We study momentum and contrarian trading of foreign and local institutions as well as local individuals using a unique ownership dataset from the Australian stock market. We find that foreign institutions are momentum investors, whereas local investors are contrarians. However, momentum trading by foreign institutions is reversed during the Global Financial Crisis indicating that their trading behavior is time-varying. We further show that momentum trading by foreign institutions decreases following a period of low market return, high market illiquidity, high market volatility, or high volatility of the momentum portfolio. Also, momentum trading by foreign institutions predicts momentum profits. We show that the disposition effect partly explains the contrarian trading by local investors, suggesting that foreign institutions’ tendency to momentum trading cannot be solely attributed to their liquidity provision to local investors.

Suggested Citation

  • Bradrania, Reza & Wu, Winston, 2023. "Foreign institutions, local investors and momentum trading," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 40-64.
    • Handle: RePEc:eee:empfin:v:73:y:2023:i:c:p:40-64
    DOI: 10.1016/j.jempfin.2023.05.005
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    More about this item

    Keywords

    Momentum trading; Investor behavior; Foreign investors; Individual investors; Local investors; Institutional investors; Investor types;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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