Do Foreign Investors Destabilize Stock Markets Through Futures Trading During the Korean Crisis in 1997?

Abstract

This paper examines the impact of foreign investors futures trading on stock prices during the Korean crisis in 1997. We first construct five-minute interval data on returns and trade flows of the KOSPI200 index futures contracts traded at the KSE, and estimate a VAR model to see whether foreign investors trade flows in futures markets caused the stock price to fall sharply during the crisis. The result shows that foreign investors net sales in futures markets had an insignificant impact on stock prices, and the impact was no larger than those of domestic individuals and institutions. As an alternative test, we compute five-minute price contributions of each type of investors in futures markets, and estimate a VAR model where the futures price contribution by each investor is allowed to interact with the KOSPI200 index stock and futures returns. The result shows that the largest impact on both futures and stock markets during the crisis came from domestic individual investors, and foreign investors selling pressure was well absorbed by domestic investors