Abstract
We study trading behavior and performance of foreign investors by management style. Using a comprehensive Colombian data set with complete transaction records and unique investor identification, we find that aggregate underperformance of foreign investors is attributable to foreign-passive funds. These funds pay higher prices to increase the speed of their trades in order to accommodate daily flows proportionally to their benchmark index.
Higher transaction costs occur on days when they trade multiple stocks in the same direction and make large trades near market closing. The findings highlight the potential costs of index investing in developing countries or in securities with low trading activity.
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Alvaro Pedraza is an Economist in the Finance and Private Sector Development Team of the World Bank's Development Research Group. His research interests include financial economics, asset pricing and macroeconomics. Prior to joining the Bank he worked at the Federal Reserve Bank of Atlanta, the Inter-American Development Bank, the Colombian Association of Pension Fund Administrators and the National Collateral Fund of Colombia. He holds a B.A. in Physics and a M.A. in Economics from Universidad de los Andes in Colombia, and a Ph.D. in Economics from the University of Maryland.
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Maestría en Ciencias en Finanzas