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Who knows better in an Emerging Market? Performance of Institutions, Foreigners and Individuals.

This study analyzes the performance of institutions, foreigners, and individuals in an emerging market, focusing on their trade execution, liquidity provision, information incorporation, and overall performance.

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Who knows better in an Emerging Market? Performance of Institutions, Foreigners and Individuals.

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  1. Who knows better in an Emerging Market? Performance of Institutions, Foreigners and Individuals. Diego A. Agudelo James E. Byder Paula A. Yepes Universidad EAFIT

  2. Motivation • Are allinvestorscreatedequal? Orthere are different roles fordifferenttypes of investors? Whoprovidesliquidity? Whoincorporatesinformation in prices? Whotrades at lowercost ? Whotradeswith a bettertiming ? Who has thebetter performance?

  3. Background

  4. Ourcontribution • Wemeasure performance of locals, separatinginstitutionsfromindividuals (retailers). Allforeigners are institutions • Provideevidence of a link betweeninformation and short term performance • Replicatetheresults of thepreviousliterature in a new emergingmarket • We are able to conciliatesome of thecontradictoryfindings of thepreviousliterature

  5. Ourmainfindings • LocalshavebettertradeexecutionthanForeigners. Local individualstend to be liquidityproviders. • Local institutionsperformbetterthanForeigners, who in turnoutperform Local individuals • In several Short-term performance measures • In several Long-term performance measures • Individuals are in aninformationdisadvantage, as shown in a MRR Bid-Ask decompositonmodel • Long term local institutions (e.g. pensionfunds) performbetter in thelongtermthan short-termones (e.gBrokeragefirms).

  6. Data : Summary of transactionsby stock-day, bytype of investor.Source: Colombian Stock Exchange (BVC). Jan 2007-May 2014

  7. Summary Trading Activitybytype of investor

  8. Results Short-term Performance measures (I) : Execution cost Daily market timing i: stock j: type of investor t: day

  9. Average trading costonbuys and sales

  10. Next-dayreturnperformacemeasure

  11. Short-term Performance measures (II) : Daily market timing weighted by traded value Daily market timing weighted by traded value an taking into account execution price i: stock j: type of investor t: day

  12. Daily performance measures

  13. One-month performance of portfolio basedon net buys

  14. 12-months performance of portfolio basedon net buys

  15. Spread decomposition to estimateinformationeffects • Marketmicrostructuremodels pose thatthebid-ask spread depends of adverse-selection and transactioncosts. • Thebid-askspread isdecomoposed in thetick-by-tick data usingtheMadhavan et. al (1997) methodology Where is the change in consecutive  transaction prices, is a buy-sell trade identifier, equal to 1 (-1) if the trade was buy-initiated (sell initiated). • Themodelisestimatedfromtick-by-tick data foreach stock-weekwith GMM • Ityieldsestimations of , the adverse-selectioncomponent of the spread, and + , theimplied spread. • We run a panel-data modelonthetwomeasures of the spread and stock-weekdeterminants.

  16. Data : Tick-by-tick, trade and quote data. Source: Bloomberg. Aug 2010-Aug 2012

  17. Informed trading effectsonthe spread bydifferenttypes of investors

  18. Summary of Results • Institutions outperform Individuals in one-day, one-month and 12 months, and with different measures • Foreigners outperform Individuals in 1 and 12-month horizon • Local Institutional advantage in portfolios is related more to the stocks they tend to sell or avoid to buy • Some evidence of Information related advantage of Local Institutions • Who knows better: Local or Foreigners? It depends on how you pose the question? • Institutions know better than Individuals • Foreigners beat Local Individual • Local Institutions have an edge over Foreign Institutions (new result)

  19. Implications • Colombian Stock Exchange is not efficient to information of stocks (-0.6% monthly alfa in Q1 portfolio) • Individuals should better institutionalize their trades (e.g buying Mutual Funds, Asset Management products) • Is just another evidence in favor of passive investment Not new, already proved in Taiwan (Barber, Lee, Liu and Odean, RFS 2009) • However, Individual trading provides a useful social good: liquidity, but are they compensated? • Foreigners do seem to be better informed than Individuals. • Another argument against capital flow barriers • Institutional Individuals beat Institutional Foreigners (a new result)

  20. Who knows better in an Emerging Market? Performance of Institutions, Foreigners and Individuals. Thanksforyourinterest Diego A. Agudelo James E. Byder Paula A. Yepes Universidad EAFIT – Medellín, Colombia

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