Foreigners’ trading and stock returns in Spain

Using monthly foreign flows data from Madrid Stock Exchange, we analyze the interaction between foreigners’ trading and stock returns, both marketwide and on individual stocks. We show that global risk appetite has a significant role in driving marketwide foreign investor flows. Our data of foreigners’ trading in individual stocks, the first on a major European market, enables an out-of-sample assessment of the theories of foreign investor behavior. Positive feedback trading, an alleged symptom of information disadvantage, is visible in individual stocks, whereas negative feedback trading is observed at the market-wide level, especially by US investors who have currency exposure.