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Review of Quantitative Finance and Accounting

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01.08.2012 | Original Research

The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market

verfasst von: Yang-Cheng Lu, Hao Fang, Chien-Chung Nieh

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2012

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Abstract

This study constructs a panel threshold regression model to explore the price impact of foreign institutional herding of firms listed in the Taiwan Stock Exchange during January 2000 to June 2008. Our panel threshold model is constructed to explore the price impact of foreign institutional investors’ herding in the Taiwan stock market after controlling the firm size. By examining the presence of threshold effect, this study analyzes whether firm size would obviously and asymmetrically affect the explanation for the effect of changes in foreign investors’ share ownership on abnormal returns. The empirical results of this study find the significant evidence of threshold effect which divides the stocks into large-size and small-size firms. It is found that foreign institutional investors in the Taiwan stock market tend to hold large-size stocks listed in the Taiwan Stock Exchange. There is an apparent increase in the subsequent abnormal returns on large-size stocks bought in bulk by foreign investors. The signals of changes in share ownership initiated by foreign institutional investors would reveal further information for improving the performance of asset reallocation decisions in Taiwan. The panel threshold model constructed in this paper well describes the price impact of institutional herding yet eschews the possibly subjective data snooping issue resulting from the two-pass sorting method as proposed by previous related researches.

Vorheriger Artikel Capital investment and momentum strategies

Nächster Artikel Analytical bounds for Treasury bond futures prices

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Hoitash and Krishnan (2008) deemed that specific measure of speculative intensity (SPEC) based on autocorrelation in daily trading volume by market participants has a significant positive impact on returns.

The series studies of Fama and French (1992, 1993, 1995, 1996) clearly pointed out that the three factors model of market, size and book-to-market ratio can catch the main variation of the cross-sectional expected returns of stocks. Daniel and Titman (1997) demonstrated that firm size and book-to-market ratio are correlated with the mean returns of assets, and the reason is not that they are the substitute of risk but that characteristics can determine the mean stock returns.

Lin and Swanson (2003) used firm size as control variable to explore subsequent performance of the winners and losers held by foreign investors while using proportion of positive net share purchases as dependent variable.

\( r_{i,t1} \) is the monthly return for individual stock i in this month and past 11 months; \( r_{f,t1} \) is the risk-free rate in this month and past 11 months, which is the interest rate for a 1-month term deposit offered by Taiwan First Bank; \( r_{m,t1} \) is the change ratio of net value of TAIEX in this month and past 11 months.

We mainly explore whether there is a difference between the post-herding premium of foreign institutional investors’ trading on the large-size stocks and the post-herding premium of their trading on the small-size stocks.

Where \( S_{0} \) and \( S_{1} \) are the residual sum of squares under the null and alternative of (12) respectively, and \( \hat{\sigma }^{2} = \hat{e}^{{*^{'} }} \hat{e}^{*} /n(T - 1) \) is residual variance under \( H_{1} \), where the residual vector is \( \hat{e}^{*} = \hat{e}^{*} \left( {\hat{\gamma }} \right) \). Under the null hypothesis the threshold is not identified, the classical tests have non-standard distributions, which is called the ‘Davies’ Problem proposed by Davies (1977).

Where \( \hat{\sigma }^{2} = S_{2}^{\tau } \left( {\hat{\gamma }_{2}^{\tau } } \right)/n(T - 1) \) and \( \gamma_{2} \) is the second threshold.

He uses the likelihood ratio statistic for tests on \( \gamma. \)

\( S_{1} (\gamma_{0} ) \) and \( S_{1} \left( {\hat{\gamma }} \right) \) are the residual sum of squares from Eq. 10 given the true threshold \( \gamma_{0} \) and estimated \( \hat{\gamma } \), respectively.

\( S\,_{2}^{\tau } \,\left( {\hat{\gamma }\,_{2}^{\tau } } \right) \) is defined in (14). The asymptotic \( (1 - \alpha )\% \) confidence intervals for \( \gamma_{2} \) and \( \gamma_{1} \) are the set of values of \( \gamma \), such that \( LR_{2}^{\tau } (\gamma ) \le C(\alpha ) \) and \( LR_{1} (\gamma ) \le C(\alpha ) \) respectively.

The means of one-month abnormal returns \( R\,_{i,t}^{a} \) from 2000.01 to 2005.12, 2006.12, 2007.12 and 2008.06 are 0.630, 0.600, 0.728 and 0.767, respectively. That is, the 1-month abnormal returns present the stable increase in price.

The LLC (2001) and IPS (1997) techniques assumed that the null hypothesis are set as unit root, and the Hadri (2001) assumed that the null hypothesis is set as stationary.

First, we find the number of firms in each regime by each month. Then, we take an average on the number of firms in a specific regime for each month by each year.

Based on the theory of Hansen (1999) for least squares threshold regression, we would expect the threshold estimates to be consistent and the distribution theory of Theorem 1 to be correct up to a scale effect.

TSEC is the Taiwan Stock Exchange Corporation.

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Titel: The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market
verfasst von: Yang-Cheng Lu
Hao Fang
Chien-Chung Nieh
Publikationsdatum: 01.08.2012
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2012
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-011-0244-1

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