Do foreign investors destabilize stock markets? The Korean experience in 1997

This paper examines the impact of foreign investors on stock returns in Kor ea from November 30, 1996 to the end of 1997 using order and trade data. We find strong evidence of positive feedback trading and herding by foreign i nvestors before the period of Korea's economic crisis. During the crisis pe riod, herding falls, and positive feedback trading by foreign investors mos tly disappears. We find no evidence that trades by foreign investors had a destabilizing effect on Korea's stock market over our sample period. In par ticular, the market adjusted quickly and efficiently to large sales by fore ign investors, and these sales were not followed by negative abnormal retur ns. (C) 1999 Elsevier Science S.A. Ah rights reserved. PACS: G11; G15; G28.