Title

The contribution of foreign investors to price discovery in the Indonesian stock exchange

Document Type

Journal Article

Publisher

World Scientific Publishing Co. Pte. Ltd.

Faculty

Faculty of Business and Law

School

School of Business/Marketing and Services Research Centre

RAS ID

16976

Comments

This article was originally published as: Sudiman, J. , Allen, D. E., & Powell, R. (2013). The Contribution of Foreign Investors to Price Discovery in the Indonesian Stock Exchange . Annals of Financial Economics, 8(2). Original article available here

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.

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