Do Foreign Investors Cause Noise in an Emerging Stock Market?

The problematic point of the noise trader model is the difficulty of measuring noise and testing theories based on noise trading. We investigate the relationship between the trading volume and the stock returns, using the Granger-causality type of methodology, as a means of testing the noise trader model. Taking four variables into consideration-three variables ofbuying, selling and netpurchases by foreign investors for the trading volume, and one variable of returns on an index for the stock returns-we examine whether foreign investors have played roles as noise traders in the Korean stock market during the recent financial turmoil, and conclude that they have transacted informed trading. The conclusion is sharply contrasted with some criticism that foreign investors, acting like noise traders, caused the stock market crash, which exacerbated the financial crisis of Korea.