Using the unique account-level data of a major Korean securities firm between 1999 and 2005, we examine whether the behavioral anomaly of domestic individual investors, as captured by the strength of their disposition effect, is affected by the inflow of foreign investors into the market. Our sample period, beginning just after the market liberalization policy that lifted the cap on the maximum ownership by foreign investors, allows for a quasi-natural experiment into how domestic individual investors perceive the foreign investors’ entry into an emerging stock market. Individual investors are found to exhibit stronger disposition effect on the stocks that experience larger recent purchases by foreign investors, hinting at their fear of foreign investors’ trading behavior. They are also likely to purchase stocks with large foreign ownership in the first place. The result is robust to a quasi-natural difference-in-difference analysis based on the inclusion of a stock into the MSCI Korea index.​

Keywords: Disposition effect, papers gains realized, trading behavior, emerging market, investor sentiment

JEL Classifications: E52, E58, G14, G23