Chun-Pin Hsu; Chin-Wen Huang; Ntoko, Alfred
September 2013
International Journal of Business & Finance Research (IJBFR);2013, Vol. 7 Issue 4, p1
Academic Journal
Foreign portfolio investment is a major means by which emerging stock markets accumulate capital. However, the high mobility of foreign funds is a concern for local investors and policymakers in emerging countries because it may induce high stock price volatility. In this study, we utilized a risk-based approach to investigate whether the stocks most favored by foreign investors are riskier than those least favored by foreign investors. We distinguished our sample stocks into foreign most-favored and foreign least-favored groups and classified our data periods into a financial crisis period and an aftermath period. We then estimated the 1% VaRs and expected maximum losses through a GARCH-extreme value theory--copula methodology for the foreign most-favored and least-favored groups. The empirical results indicated that the foreign most-favored group had lower 1% VaRs than the foreign least-favored group during both the financial crisis and its aftermath. However, the foreign most-favored group had higher expected maximum losses than the foreign least-favored group. Thus, although stocks favored by foreign investors may not be riskier in general, investing in these stocks could still occasion disaster in an extreme event.


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