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Optimism in foreign investors

Author

Listed:
  • Meziane Lasfer
  • Sharon Xiaowen Lin
  • Gulnur Muradoglu

Abstract

Purpose - The purpose of this paper is to compare the short‐term trading behaviour of A shares owned by domestic investors and their dually‐traded B shares owned by foreign investors, after a period of significant price change. Design/methodology/approach - Given that the fundamentals of A and B shares are the same, the paper tests the hypothesis that both types of stocks should behave homogeneously either by exhibiting a momentum behaviour or an over‐reaction pattern. The paper relates any deviations in post‐shock stock returns to the differences in the trading patterns of foreign relative to domestic investors. Findings - While the prices of the A shares are relatively random after the event, those of the B shares carry on increasing significantly after both positive and negative shocks. This trend is more pronounced for large firms with high liquidity, in contrast to the efficient market hypothesis expectations, which suggests that any abnormal performance should be arbitraged away sooner in a frictionless (in this case liquid) market. Originality/value - The paper relates these results to the high level of optimism of foreign investors, which is an under‐researched area in behaviour finance.

Suggested Citation

  • Meziane Lasfer & Sharon Xiaowen Lin & Gulnur Muradoglu, 2012. "Optimism in foreign investors," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 4(1), pages 8-27, July.
    • Handle: RePEc:eme:rbfpps:v:4:y:2012:i:1:p:8-27
    DOI: 10.1108/19405971211261083
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    Citations

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    Cited by:

    1. Ila Patnaik & Ajay Shah & Nirvikar Singh, 2013. "Foreign Investors under Stress: Evidence From India," International Finance, Wiley Blackwell, vol. 16(2), pages 213-244, June.

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