Effects of foreign portfolio investments on the stock market

Following the development of financial markets, the effects of foreign capital movements on capital markets have become the subject of numerous studies. While increased financial integration and technological advancements have enabled foreign capital inflows and outflows to be realised rapidly, it has been widely debated in the literature that portfolio investments, often referred to as hot money, adversely affect the capital markets of developing countries in the short run, especially when they leave the country's economy. In this study, a sample comprising 271 firms listed on BIST during the period from January 3, 2012, to September 10, 2023, was utilized to examine the impact of daily foreign portfolio investments on equity markets. The study employed a panel regression model to test the Base Broadening Hypothesis, the Price Pressure Hypothesis and the Feedback Trading Hypothesis, focusing on groups categorized by investor types and the firms most actively traded by foreign investors on a daily basis and the findings reveal that the Base Broadening Hypothesis holds true for BIST. Furthermore, the study provides evidence supporting the validity of the Price Pressure Hypothesis indicating that foreign investors exert price pressure on the market for up to nine trading days in retrospect. Finally, it was concluded that foreign investors do not engage in feedback-based buying and selling across the overall sample. However, the analysis conducted at the firm group level revealed that foreign funds and institutional investors engage in positive feedback trading in the shares of the firms ranked in the top group for the highest trading activity by foreign investors. Among the common factors included within the factor models, KUR, FAİZ, CDS, and VIX negatively affect stock returns, whereas MSCI positively influences stock returns. These results indicate that the behavior of foreign investors has a significant impact on the stock prices of firms listed on BIST. Moreover, the fact that the analyses were conducted at a daily frequency and based on investor types has allowed for a clearer identification of these effects.