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The Contribution Of Foreign Investors To Price Discovery In The Indonesian Stock Exchange

Author

Listed:
  • JOSEPHINE SUDIMAN

    (Polytechnics State of Padang, Kampus Limau Manis, Padang, Sumatera Barat, West Sumatra 25000, Indonesia)

  • DAVID EDMUND ALLEN

    (Centre for Applied Financial Studies, University of South Australia, GPO Box 2471, Adelaide South Australia 5001, Australia;
    School of Mathematics and Statistics, The University of Sydney, New South Wales 2006, Australia)

  • ROBERT JOHN POWELL

    (School of Accounting, Finance and Economics, Edith Cowan University Australia, 270 Joondalup Drive, Joondalup, 6027 Western Australia, Australia)

Abstract

This article examines the contribution of foreign investors to price discovery by applying a vector error correction model (VECM) to 30 frequently-traded stocks on the Indonesia Stock Exchange. We use the Lee and Ready (1991) rule to determine the initiator of a trade and compute the volume weighted average price (VWAP) for every 30 min interval during the period 2004–2006. There are three key findings. First, foreign investors are more aggressive than local investors in placing their orders yet foreigners do not trade as often as locals. Second, the profits of foreign investors are smaller than local investors. Third, foreign investors need to adjust their trade price at a higher magnitude to achieve price equilibrium, which indicates that the majority of price discovery occurs among local investors in the Indonesian market.

Suggested Citation

  • Josephine Sudiman & David Edmund Allen & Robert John Powell, 2013. "The Contribution Of Foreign Investors To Price Discovery In The Indonesian Stock Exchange," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 1-24.
    • Handle: RePEc:wsi:afexxx:v:08:y:2013:i:02:n:s2010495213500085
    DOI: 10.1142/S2010495213500085
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    References listed on IDEAS

    as
    1. Helmut Lütkepohl, 2005. "New Introduction to Multiple Time Series Analysis," Springer Books, Springer, number 978-3-540-27752-1, January.
    2. Jianxin Wang, 2007. "Foreign Ownership and Volatility Dynamics of Indonesian Stocks," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 14(3), pages 201-210, September.
    3. Wang, Jianxin, 2007. "Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand," Journal of Development Economics, Elsevier, vol. 84(2), pages 798-811, November.
    4. Rhee, S. Ghon & Wang, Jianxin, 2009. "Foreign institutional ownership and stock market liquidity: Evidence from Indonesia," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1312-1324, July.
    5. Jianxin Wang, 2013. "The impact of foreign ownership on stock volatility in Indonesia," Published Paper Series 2013-4, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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    More about this item

    Keywords

    Price discovery; foreign investors; vector error correction model; JEL Classifications: G10; JEL Classifications: G12; JEL Classifications: G15;
    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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