Dynamic interactions between institutional investors and the taiwan stock returns: One-regime and threshold VAR models

Abstract

This paper constructs a six-variable VARmodel (includingNASDAQ returns, TSE returns, NT/USD returns, net foreign purchases, net domestic investment companies (dic) purchases, and net registered trading firms (rtf) purchases) to examne: (i) the interaction among three types of institutional investors, particularly to test whether net foreign purchases lead net domestic purchases by dic and rtf (the so-called demonstration effect); (ii) whether net institutional purchases lead market returns or vice versa; and (iii) whether the corresponding lead-lag relationship is positive or negative? The results of unrestricted VAR, structural VAR, and multivariate threshold autoregression models show that net foreign purchases lead net purchases by domestic institutions and the relation between them is not always unidirectional. In certain regimes, depending on whether previous day's TSE returns are negative or previous day's NASDAQ returns are positive, we find ample evidence of a feedback relation between net foreign purchases and net domestic institutional purchases. The evidence also supports a strong positivefeedback trading by institutional investors in the TSE. In addition, it is found that net dic purchases negatively lead market returns in Period 4. The MVTAR results indicate that net foreign purchases lead market returns when previous day's NASDAQ returns are positive and have a positive influence on returns. Readers are well advised to refer to chapter appendix for detailed discussion of the unrestricted VAR model, the structural VAR model, and the threshold VAR analysis.