The trading behavior and price impact of foreign, institutional, individual investors and government: Evidence from Korean equity market

We examine the dynamic relation between stock returns and four types of investment flows using Korean daily data for the period 1998-2010, focusing on the investment/trading behavior of four types of investors - individual, institutional, government, and foreign - and the effect of cross-border investment flows on the Korean equity market. We find that, first, foreigners and institutional investors tend to drive the Korean equity market, and their trades seem to be information-driven, whereas individual investors do not drive the Korean equity market and their trades do not seem to be information-driven. Second, as a result, both foreigners and institutional investors performed well in the sample period, whereas individual investors performed poorly. Third, the four types of investors differ in their trading behavior. In response to U.S. market returns, foreigners and institutional investors tend to take a momentum strategy whereas individual investors and government tend to take a contrarian strategy. (C) 2011 Elsevier B.V. All rights reserved.