The structural change of stock returns and volatility subsequent to the deregulation for foreign investment in Taiwan markets
Authors: Bi-Huei Tsai
Journal: Chia Da Management Review. Jun. 2009, 29(1): 175-208.
Keywords: Buy-Sell difference; Structural change; CARCH model; Institutional investors; Momentum hypothesis; Information effect hypothesis
Abstract:
Since 2003, Taiwan has relaxed the restrictions for foreign investment and permitted foreign investors to freely invest in Taiwan stock
markets. The purpose behind enacting this policy was the belief that foreign investors could promote Taiwan investors to come up with sound
investment strategies through greater awareness of the fundamental information of public companies. However, previous studies did not
meticulously investigate the incremental impact of foreign behavior on market returns nor did they look into the volatility many years after
the deregulation. Hence, the purpose of this paper is to compare the effect of foreign buy-sell difference on the stock returns and the
volatility prior and subsequent to Taiwan's deregulation of the foreign investment. The aims of the research are to examine whether structural
change is present in both stock returns and volatility in the Taiwanese markets after the restriction relaxed. First, this paper explores
whether foreign buy-sell difference is positively related to stock returns in the Taiwan Stock Exchange. Second, this article examines whether
smaller correlation exists between foreign buy-sell difference and stock returns after the lifting of foreign portfolio investment. In
addition, we analyze whether volatility significantly decreases after the foreign investment restriction has relaxed. The results show that
foreign buy-sell difference is positively related to stock returns in the Taiwan Stock Exchange. This suggests that foreign institutions may
lead Taiwanese investors to buy or sell Taiwanese stocks, which may in turn affect the demand for Taiwanese stocks. Such relations declined
after the lifting of foreign investment limit, suggesting that the influence of foreign investment strategies on investment decisions of many
Taiwanese investors mitigated after foreign investment restrictions were relaxed. Furthermore, the long-term volatility substantially decreased
for firms with larger foreign ownership, which points out the stabilization of stock markets during post-deregulation periods.