Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand

This paper documents a strong contemporaneous relationship between foreign equity trading and market volatility in Indonesia and Thailand. Although foreign selling accounts for only a small portion of daily trading, it has the highest explanatory power for market volatility in both countries. Trading within foreign and local investor groups is often negatively related to volatility. The findings are robust to different sub-periods and different measures for volatility and trading activities. We explore two economic explanations for the asymmetric effects of foreign and local investors. (c) 2006 Elsevier B.V. All rights reserved.