Did foreign investors destabilise the Korean stock market in 1997?

Abstract

This paper examines if foreign investors destabilised the Korean stock market in 1997 by comparing market prices and the respective net asset values of closed-end country funds. If financial markets are efficient, market prices must be equal to their net asset values due to market arbitrage. As a result of market failures and barriers to arbitrage, however, market prices may be different from their net asset values. Specifically, market prices may reflect the sentiments of foreign investors since they are traded in foreign financial markets. On the other hand, their net asset values may reflect the sentiments of domestic investors since they are determined by trading in domestic markets. This paper finds no evidence of foreigners having had superior information or destabilising the Korean stock market in 1997.