KDI Policy Forum Analysis of Equity Flows of Foreign Investors in Korean Stock Markets April 21, 2003
April 21, 2003
- Summary
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Foreign investors sold Korean stocks and the KOSPI index declined significantly since the end of 2002, and there are some concerns that the confidence of foreign investors in Korean economy might have been deteriorated and the so called "Sell Korea" might occur.
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Given that there have been a series of important events such as oil price hike, North Korea nuclear problem, and the accounting fraud of SK Global, it is meaningful to assess which factors drive trading patterns of foreign investors in Korean stock markets.
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Empirical analyses show that stock price decline and stock selling of foreign investors in Korea can be explained by business cycle related factors such as the decline of U.S. stock prices and the deterioration of terms of trade, although there was some influence of increasing concerns on the North Korean nuclear problem.
- Empirical research using monthly data between April 1996 and December
2002 has shown that terms of trade and stock prices in the U.S. had a statistically
significant effect on the equity flows of foreign investors in Korea, while
industrial production of Korea and the U.S. did not. Dynamic analysis shows
that one percent point decline of the growth rate of the terms of trade
incurs equity outflow of 88 billion Won for that month.
- There was some effects of the North Korean nuclear problem on the equity
flows from foreign investors. After North Korea's announcement on its nuclear
development, foreign investors seemed to accelerated net sale of Korean
stocks, though modestly.
- After the discovery of the accounting fraud of SK Global, foreign investors sold off individual stocks due to this event. But they bought stocks of several financial and SK related companies which are not directly affected by this accounting fraud. Therefore the worries about the market contagion due to this scandal has not been realized.
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Considering the results of the analyses above, it is not appropriate to argue that stock selling by foreign investors in the first quarter of 2003 is a "Sell Korea".
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As the Iraq War has come to an end, the terms of trade will not be deteriorated more in the 2nd quarter. Therefore, stock investment outflow of foreign investors due to the aggravated terms of trade is expected to decrease in the 2nd quarter.
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On the other hand, foreign investors will pay more attention to the progress of the North Korean nuclear problem and accounting fraud of SK Global. To alleviate concerns of foreign investors regarding the North Korean nuclear problem, it is recommended to pursue various political and diplomatic measures to cope with the problem.
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The accounting fraud of SK Global has not caused a serious market contagion effect. Considering this, accounting fraud should be handled based on the market principals without delay. In addition, it is not desirable to make other firms under the control of SK conglomerate share the losses from the accounting fraud.
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To maintain the confidence of foreign investors, the authorities should strengthen the discipline regarding transparency by clearly establishing legal responsibility of the parties involved in the book auditing.
- Empirical research using monthly data between April 1996 and December
2002 has shown that terms of trade and stock prices in the U.S. had a statistically
significant effect on the equity flows of foreign investors in Korea, while
industrial production of Korea and the U.S. did not. Dynamic analysis shows
that one percent point decline of the growth rate of the terms of trade
incurs equity outflow of 88 billion Won for that month.
- Contents
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1. 문제의 제기
2. 주식시장 동향
3. 외국인 투자자 주식매매의 결정요인 실증분석
가. 경제여건과 외국인 순매수: 월별 자료 분석
나. 경제외적 여건 변화와 외국인 순매수: 일별 자료 분석
다. SK Global의 분식회계와 외국인 매매: Contagion Effect를 중심으로
4. 전망 및 시사점
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