Who provides liquidity in retail-dominated markets? Evidence from Korea

초록

In the less liquid segment of the Korean equity market, foreign net trading exhibits the return patterns associated with risk-averse liquidity provision, a role that has been documented for retail investors in the U.S. setting. Using eleven years of weekly investor-level trading data, we show that net buying by foreigners predicts positive future returns at short horizons, with the magnitude of the abnormal return rising monotonically across illiquidity terciles. The corresponding patterns for institutional and individual investor flows differ in sign and statistical strength, and the foreign predictability in the less liquid segment is robust to alternative specifications of the trading-imbalance measure, the illiquidity proxy, the asset-pricing benchmark, the sample of stocks, and the procedure used to rank stocks by net imbalance of trading (NIT). Indirect microstructure tests on the information ordering across investor types, the contemporaneous price impact of trading, the horizon decay of the long–short alpha, and the dependence of the predictability on the degree of foreign presence are each consistent with the liquidity-provision interpretation. The pattern is consistent with a structural feature of the Korean market in which domestic individuals account for the majority of trading volume without displaying the contrarian or short-horizon predictive content of U.S. retail flow. Copyright © 2026. Published by Elsevier B.V.

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