Offshore Investment Funds : Monsters in Emerging Markets?
- Offshore Investment Funds : Monsters in Emerging Markets?
- Kim, Woochan; Wei, Shang-Jin
- offshore funds; foreign investment; crisis; feedback trading; herding
- Issue Date
- Series/Report no.
- KDI Working Paper Series;01-02
- The 1997-98 financial crises in the emerging markets have brought to the
foreground the concern about offshore investment funds and their possible role in
exacerbating financial market volatility. Offshore investment funds are alleged to engage
in trading behaviors that are different from their onshore counterparts. Because they are
less moderated by tax consequences, and are subject to less supervision and regulation,
the offshore funds may trade more intensely. They could also engage more aggressively
in certain trading patterns such as positive feedback trading or herding that could
contribute to greater market volatility.
Using a unique data set, we compare the trading behavior in Korea by offshore
funds with that of thee sets of onshore funds as control groups. There are a number of
interesting findings. First, the offshore funds do trade more intensely than their onshore
counterparts. Second, however, the offshore funds do not engage in positive feedback
trading in a significant way. In contrast, there is strong evidence that the onshore funds
from the U.S. and U.K. do. Third, while offshore funds herd, they do so significantly less
than the onshore funds during the crisis. In sum, the offshore funds are not especially
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