Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows

This paper studies the trading behavior and performance of foreign investors with different management styles. The analysis uses a comprehensive Colombian data with complete transaction records and unique investor identification, and finds that the...

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Main Authors:	Pedraza, Alvaro, Pulga, Fredy, Vasquez, Jose
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2017
Subjects:	FOREIGN INVESTORS DIRECT FOREIGN INVESTMENT INDEX FUNDS INVESTMENT FLOWS
Online Access:	http://documents.worldbank.org/curated/en/937231489425579792/Do-foreign-investors-underperform-An-empirical-decomposition-into-style-and-flows http://hdl.handle.net/10986/26344

id	okr-10986-26344
recordtype	oai_dc
spelling	okr-10986-263442021-06-08T14:42:48Z Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows Pedraza, Alvaro Pulga, Fredy Vasquez, Jose FOREIGN INVESTORS DIRECT FOREIGN INVESTMENT INDEX FUNDS INVESTMENT FLOWS This paper studies the trading behavior and performance of foreign investors with different management styles. The analysis uses a comprehensive Colombian data with complete transaction records and unique investor identification, and finds that the aggregate under-performance of foreign investors is attributable to foreign passive funds, that is, those that replicate a benchmark index. These funds pay higher prices to increase the speed of their trades to accommodate daily flows proportionally to their index before market closing. Passive funds face higher transaction costs on days when they trade multiple stocks in the same direction, buy (sell) the same stock multiple times, and make large trades near the daily closing time. Meanwhile, foreign active funds trade at more favorable prices and display higher risk-adjusted returns than any other investor group, including domestic funds with similar active management. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity (small stocks). 2017-04-12T21:05:06Z 2017-04-12T21:05:06Z 2017-03 Working Paper http://documents.worldbank.org/curated/en/937231489425579792/Do-foreign-investors-underperform-An-empirical-decomposition-into-style-and-flows http://hdl.handle.net/10986/26344 English en_US Policy Research Working Paper;No. 8002 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Latin America & Caribbean Colombia
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	FOREIGN INVESTORS DIRECT FOREIGN INVESTMENT INDEX FUNDS INVESTMENT FLOWS
spellingShingle	FOREIGN INVESTORS DIRECT FOREIGN INVESTMENT INDEX FUNDS INVESTMENT FLOWS Pedraza, Alvaro Pulga, Fredy Vasquez, Jose Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
geographic_facet	Latin America & Caribbean Colombia
relation	Policy Research Working Paper;No. 8002
description	This paper studies the trading behavior and performance of foreign investors with different management styles. The analysis uses a comprehensive Colombian data with complete transaction records and unique investor identification, and finds that the aggregate under-performance of foreign investors is attributable to foreign passive funds, that is, those that replicate a benchmark index. These funds pay higher prices to increase the speed of their trades to accommodate daily flows proportionally to their index before market closing. Passive funds face higher transaction costs on days when they trade multiple stocks in the same direction, buy (sell) the same stock multiple times, and make large trades near the daily closing time. Meanwhile, foreign active funds trade at more favorable prices and display higher risk-adjusted returns than any other investor group, including domestic funds with similar active management. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity (small stocks).
format	Working Paper
author	Pedraza, Alvaro Pulga, Fredy Vasquez, Jose
author_facet	Pedraza, Alvaro Pulga, Fredy Vasquez, Jose
author_sort	Pedraza, Alvaro
title	Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
title_short	Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
title_full	Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
title_fullStr	Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
title_full_unstemmed	Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows
title_sort	do foreign investors underperform? : an empirical decomposition into style and flows
publisher	World Bank, Washington, DC
publishDate	2017
url	http://documents.worldbank.org/curated/en/937231489425579792/Do-foreign-investors-underperform-An-empirical-decomposition-into-style-and-flows http://hdl.handle.net/10986/26344
_version_	1764461749269954560

Do Foreign Investors Underperform? : An Empirical Decomposition into Style and Flows

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