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Foreign Equity Trading and Average Stock‐return Volatility

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World Economy

Published online on

Abstract

We exam,ine whether there is a rela,tion,ship between for,eign equity trad,ing and aver,age total vol,a,til,ity, mea,sured as the value‐weighted aver,age of stock‐return variance in the Istan,bul Stock Exchange. We employ for,eign equity pur,chase and sale data to track changes in for,eign equity trad,ing, which not only enable us to cap,ture effec,tive for,eign inves,tor par,tic,i,pa,tion but also to observe the potential asym,met,ric effects of incom,ing and out,go,ing funds on the aver,age total vol,a,til,ity. Con,sis,tent with the impli,ca,tions of the asym,met,ric infor,ma,tion hypoth,e,sis, we find that net equity flow is pos,i,tively asso,ci,ated with aver,age total vol,a,til,ity. Fur,ther,more, we show that net equity flow affects the aver,age total vol,a,til,ity through the local and idi,o,syn,cratic vol,a,til,i,ties, sug,gest,ing that for,eign inves,tors engage in the production of firm specific and market wide information.