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Market-Based Solutions to Vital Economic Issues
Research
May 19, 2022

Are Foreign Investors Informed? Trading Experiences of Foreign Investors in China

Abstract

Using a proprietary dataset from 2016 to 2019, we find that order flows from foreign investors, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns in the Chinese market. Most surprisingly, foreign investors possess the ability to process local firm-level public news, and their predictive power is particularly strong on large price movement days when the implications of firm-level information are likely most pronounced. Evidence also shows that foreign investors have some capability in processing global market-level information. Finally, regulatory reforms that generally relax investment access requirements further improve foreign investors’ predictive power.


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