Optimism in foreign investors
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.
Keywords
Citation
Lasfer, M., Xiaowen Lin, S. and Muradoglu, G. (2012), "Optimism in foreign investors", Review of Behavioral Finance, Vol. 4 No. 1, pp. 8-27. https://doi.org/10.1108/19405971211261083
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited