The effect of foreign investors on security markets: The case of ISE

One of the mostly analyzed and discussed subjects ise globalization. Globalization led the emergence of foreign investment. Financial globalization and liberalization, which is the one dimension of globalization helped the increase in foreign portfolio investment by abolishing obstacles related to foreign investment. Foreign portfolio investment, which inceased in the 1980s has become more influential on markets. The increasing effect of foreign portfolio investments has directed research on this subject. There are studies in the literature especially about the role of financial liberalization and foreign portfolio investment, and their effects on the economy and markets. The effect of foreign portfolio investment on ISE is analyzed in this study. ISE-100 index, ISE-30 index, ISE-broad index, the number of listed firms, price/earnings ratio, the number of transactions, value of share trading, value of share trading/market capitalization ratio, market capitalizion and dividend/price ratio are studied as indicators related with ISE. Foreign portfolio investment is examined as three subgroups: purchases, sales and net. Correlation, regression analysis, unit root tests, cointegration analysis and causality tests are used in the study, which covers the period of 1997-2007. The results show that there is a long-run relation (cointegration) between purchases and sales of foreign investors, and ISE-100 index, ISE-30 index, ISE-broad index, the number of listed firms, the number of transactions, value of share trading and market capitalizion. The purchases of foreign investors have a positive effect and the sales of foreign investors have a negative effect on these indicators, and their explanatory power is quite high. On the other hand, net foreign portfolio investments explanatory power ise limited. Key Words: Foreign portfolio investments, Istanbul Stock Exchange, cointegration analysis, causality analysis, regression analysis.