CID Working Paper No. 6

Foreign Portfolio Investors before and during a Crisis

Woochan Kim and Shang-Jin Wei

March 1999

Abstract

Using a unique data set, we study the trading behavior of foreign portfolio investors in Korea before and during the currency crisis. Different categories of investors have significant differences as well as similarities. First, non-resident institutional investors are always positive feedback traders, whereas resident investors before the crisis were negative feedback (contrarian) traders but switch to be positive feedback traders during the crisis. Second, individual investors herd significantly more than institutional investors. Non-resident (institutional as well individual) investors herd significantly more than their resident counterparts. Third, differences in the Western and Korean news coverage are correlated with differences in net selling by non-resident investors relative to resident investors.

Keywords: foreign portfolio investment, crisis, feedback trading, herding

JEL codes: F21, F3, G15

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