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Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea

Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea In this paper, we examine the factor exposures of foreign equity capital in a domestic stock market in order to understand its risk‐taking behavior and sources of returns in the market. Using data from Korea for the 1999–2013 period, we find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor, which is long on low‐IVOL stocks and short on high‐IVOL stocks. That is, foreign equity capital is typically allocated to low‐IVOL stocks and profits from the return differential between low‐IVOL and high‐IVOL stocks. We also find that foreign equity capital moves in a way that it is loaded more on the IVOL factor when the IVOL factor premium is larger. We discuss the comparative advantage of foreign equity capital in bearing the IVOL factor risk and the role of information asymmetry between locals and foreigners in this risk sharing. We also provide additional empirical results that support our interpretation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Review of Finance Wiley

Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea

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References (24)

Publisher
Wiley
Copyright
© 2017 International Review of Finance Ltd. 2017
ISSN
1369-412X
eISSN
1468-2443
DOI
10.1111/irfi.12129
Publisher site
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Abstract

In this paper, we examine the factor exposures of foreign equity capital in a domestic stock market in order to understand its risk‐taking behavior and sources of returns in the market. Using data from Korea for the 1999–2013 period, we find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor, which is long on low‐IVOL stocks and short on high‐IVOL stocks. That is, foreign equity capital is typically allocated to low‐IVOL stocks and profits from the return differential between low‐IVOL and high‐IVOL stocks. We also find that foreign equity capital moves in a way that it is loaded more on the IVOL factor when the IVOL factor premium is larger. We discuss the comparative advantage of foreign equity capital in bearing the IVOL factor risk and the role of information asymmetry between locals and foreigners in this risk sharing. We also provide additional empirical results that support our interpretation.

Journal

International Review of Finance – Wiley

Published: Jan 1, 2017

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