University of New South Wales University of New South Wales

Foreign Trading and Market Volatility in Indonesia

Email address: Jx.wang@unsw.edu.au

Abstract:
This paper provides evidence on the benefits and potential risks associated with foreign equity investment. The market volatility in Indonesia is examined in relation to different types of transactions by foreign and local investors. Foreign selling has a significant impact on market volatility throughout the sample period, even though foreign investors are net buyers of Indonesian stocks and foreign selling accounts for only 13% of daily trading. On the other hand, transactions among foreign investors account for 26% of daily trading but do not affect local market volatility. The large orders placed by foreign institutional investors improve local market depth and liquidity. The results clearly demonstrate that different types of transactions have different impact on market volatility, and using aggregate foreign flows or net foreign flows may produce biased results.

PDF file of paper: wang_jx.pdf

Session: Volatilities

Time: Friday, 6 July, 8:45am - 10:15am

Room: A