Foreign investors' role in a stock market boom and bust cycle: Turkey's experience in 1999-2001

Abstract

This dissertation explores the investment strategy of foreign portfolio investors in theIstanbul Stock Exchange and their impact on the market during the turbulent periodbetween 1999-2001 which includes a rally and two crises. Data used is high-frequency daily investment flows constructed from the custody account balances with Takasbank.Analysis of the data shows a strong positive impact of foreign flows on market returnswhich are limited to the same-day, but the relationship changes during the crisis periods.During the November liquidity crisis, foreign selling persists beyond one-day and has a de-stabilizing effect on the index. During the next crisis in February, the impact isreversed and foreign investors help stabilize the market. Another result is that foreign investors buy the day after the market index rises and sell the day after the index falls;they are positive feedback traders like most institutional investors. Foreign investors also fail to obtain any excess returns on the ISE. This inability is explained by their highsh are in the total free float of the market. A cross-section analysis reveals a negative and significant relationship between their share and the excess returns they obtain. Finally,higher foreign investment in a stock appears to increase the return volatility of that stock.