Investor behavior, stock returns and CDS spreads: evidence from foreign and domestic investors in Korea

ORCID Identifiers

0000-0002-5515-2875

Document Type

Article

Source of Publication

International Journal of Managerial Finance

Publication Date

1-1-2020

Abstract

© 2020, Emerald Publishing Limited. Purpose: This study investigates the dynamic relationships among trading behaviors of different investor groups (foreigners, domestic institutions and domestic individuals), stock returns and sovereign CDS (Credit Default Swap) spreads in Korea. Design/methodology/approach: We employ the VAR (Vector autoregression) model to examine the dynamic relationships between CDS spread changes, stock returns and investors' behavior in the stock market. Findings: The CDS spread change (stock return) declines (rises) in response to shocks to net foreign flows into the stock market on the same day. Foreigners buy stocks more intensely one day after an increase in the stock return, but they do not respond to CDS spread changes. Domestic individuals trade in the opposite direction of foreigners in response to shocks to both stock returns and CDS spread changes on the same day. Positive net stock purchases of domestic institutions (individuals) predict positive (negative) stock returns and negative (positive) CDS spread changes next day. Originality/value: This study extends prior studies by examining how different investor groups' trading behaviors in the stock market are associated with not only the stock market but also a closely related market (CDS market). Prior empirical studies on the relation between the stock and CDS markets do not pay attention to possible heterogeneity in trading behavior across different types of investors in the stock market.

ISSN

1743-9132

Publisher

Emerald

Disciplines

Business

Keywords

Investor behavior, Korean stock market, Sovereign CDS

Scopus ID

85097956613

Indexed in Scopus

yes

Open Access

no

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