The trading behavior of foreign, domestic institutional, and domestic individual investors: Evidence from the Taiwan stock market

In this paper, we apply the threshold cointegration model of Hansen and Seo (2002), incorporating differences in the nonlinear behavior of investors across regimes. An examination of the trading behavior of foreign, domestic institutional, and domestic individual investors in Taiwan revealed no predominance among the three types of investors. When the market was near equilibrium, the purchases of domestic individual investors positively impacted stock prices. This finding, which is consistent with Choe et al. (2005), suggests that domestic individual investors have an edge in investment performance over other types of investors. However, when the market departed substantially from equilibrium, the purchases of foreign and domestic institutional investors predicted a rise in stock prices. On the other hand, domestic individuals traded at worse stock prices; these prices tended to fall (rise) after the purchase (sale).

► We analyze the non-linear dynamic trading behavior of investors using the threshold cointegration model of Hansen and Seo (2002). ► Neither foreign, domestic, nor individual investors were found to be predominant in the market. ► Foreign (as well as domestic) institutional investors performed quite well when the market deviated markedly from equilibrium. ► In contrast, the domestic individual investors outperformed their foreign and domestic institutional counterparts when the market was near equilibrium.