Investor behavior, stock returns and CDS spreads: evidence from foreign and domestic investors in Korea

Abstract

PurposeThis study investigates the dynamic relationships among trading behaviors of different investor groups (foreigners, domestic institutions and domestic individuals), stock returns and sovereign CDS (Credit Default Swap) spreads in Korea.Design/methodology/approachWe employ the VAR (Vector autoregression) model to examine the dynamic relationships between CDS spread changes, stock returns and investors' behavior in the stock market.FindingsThe CDS spread change (stock return) declines (rises) in response to shocks to net foreign flows into the stock market on the same day. Foreigners buy stocks more intensely one day after an increase in the stock return, but they do not respond to CDS spread changes. Domestic individuals trade in the opposite direction of foreigners in response to shocks to both stock returns and CDS spread changes on the same day. Positive net stock purchases of domestic institutions (individuals) predict positive (negative) stock returns and negative (positive) CDS spread changes next day.Originality/valueThis study extends prior studies by examining how different investor groups' trading behaviors in the stock market are associated with not only the stock market but also a closely related market (CDS market). Prior empirical studies on the relation between the stock and CDS markets do not pay attention to possible heterogeneity in trading behavior across different types of investors in the stock market.

Business strategy, intellectual capital, firm performance, and bankruptcy risk: evidence from Oman's non-financial sector companies

“…According to Fama (1991), the semi-strong form of efficient market hypothesis suggests stock prices incorporate and reflect all available public information. Thus, prior studies have used stock return as a suitable measure of firm performance (Dalwai et al , 2021; Yang et al , 2021; Chandra et al , 2019). As seen in columns (1) and (8) strategy, A-VAIC, HCE, SCE, and CEE have no significant association with stock return.…”

Pandemic-driven financial contagion and investor behavior: Evidence from the COVID-19

“…However, there is a substantial challenge in these works: Investor behavior is indirectly measured. Indirect proxies for investor behavior such as the net stock purchase ( Baker & Wurgler, 2006 ) and dividend premium ( Yang et al, 2021 ) are hard to timely and accurately reflect the real behavior of investors ( Chundakkadan and Nedumparambil, 2021 , Cookson and Niessner, 2020 , Fan et al, 2021 , Gu and Kurov, 2020 ). As an alternative behavior measurement, the direct proxy variable based on online search engines shows the information flow in financial markets more authentic and comprehensive ( Hsieh et al, 2020 ), and it has been widely used in asset pricing and market efficiency ( Da et al, 2015 , Gao et al, 2020 , Gu and Kurov, 2020 , Hsieh et al, 2020 ).…”

“…In each case, the empirical results remain robust. Inspired by Baker et al (2012) ’s idea of global and local sentiment, Huang et al (2016) ’s idea of local and nonlocal attention, and Yang et al (2021) ’s idea of foreign investors’ trading behavior and domestic investors’ trading behavior, we also construct global attention index and local attention index. The global attention index at time is constructed by averaging the attention indices of the 26 countries ( Gao et al, 2020 ).…”

The Nexus Between Covid-19 and Stock Returns: Evidence From Selected Mena Countries

“…Since the Credit Default Swap (CDS) of the countries, which are related with the risk of default on debt securities, have a potential to influence stock index returns; weekly CDS of each country calculated from 5-year debt securities are incorporated into the model as a control variable. In literature, studies focusing on stock returns have embedded CDS figures into the empirical analysis since the CDS market is considered to display mixed results as to the informational role on the stock market (Yang and Samitas, 2020). Furthermore, there are studies that reveal the existence of a relationship between stock returns and CDS (Trutwein et al, 2011;and Kapadia and Pu, 2012).…”