Foreign Investor Flows and 'Blue Chip' Stock Returns

The purpose of this paper investigates the direction of causality between the monthly stock returns and the monthly net foreign investor flows, and the existence of feedback trading by foreign investors for the "blue chip" stocks of the Istanbul Stock Exchange (ISE), an emerging stock market. Monthly net foreign investor flows and stock returns of "blue chip" stocks for the period January 1997-June 2010 are used. Particularly, taking into account the structural changes in the foreign investor trading activity, the study focuses on the two sub-periods; before and after the start of European Union (EU) accession negotiations of Turkey. The study uses the bivariate VAR Granger causality approach, impulse response analysis and uses regressions with the vector autoregressive structure and contemporaneous structure (without lag). Unidirectional Granger causality running from monthly stock returns to monthly net foreign investor flows is detected for the pre-EU accession negotiations period accompanied by a negative feedback trading effect, but a causality relationship and feedback trading could not be established for the post EU accession negotiations period. The relationship is a contemporaneous one rather than a lagged relationship for the latter period