When foreigners lack private information and cannot engage in stock-picking in a domestic stock market, the remaining way of their making money is to take on risks and earn risk premiums. In this paper, we focus on a market that is fully open to foreigners but is also known to put them at an informational disadvantage—namely, Korea—and examine the factor exposures of foreign equity capital in the market in order to understand its risk-taking behavior and sources of return. We find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor. That is, foreign equity capital is typically allocated to low-IVOL stocks and profits from the return differential between low- 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. The leaning toward other firm characteristics—such as large and growth stocks—does not contribute to the factor premium earned by foreigners. 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 support for our interpretation.
Keywords: Foreign investors; Factor loadings; Idiosyncratic volatility; Korea
JEL classification: F30; G11; G15
자료실
자료실
[2014년 제 4차] Factor exposures of foreign equity capital in domes
작성자 : 관리자
조회수 : 1016
게시일 :
2014-12-12