We document a striking anomaly in international capital flows that we term "sanction arbitrage": U.S. investors exploited the 2014 sanctions on Russia by significantly increasing holdings in Russian equities while Rest-of-World (ROW) investors fled. We rationalize this behavior through a simple game-theoretic model where the sanctioning government faces a trade-off between geopolitical objectives and domestic welfare, effectively creating a protective shield for domestic investors and driving out ROW investors. Empirically, we confirm that pre-sanction U.S flows negatively predicted subsequent sanction designations. Consequently, U.S. investors internalized this protection to act as opportunistic buyers, absorbing fire-sale assets from exiting foreign investors and capturing significant excess returns from Russian stock holdings. These findings reveal that "smart" sanctions designed to preserve market access can inadvertently generate wealth transfers from foreign to domestic agents.

February 9, 2025 marks the 10th anniversary of the establishment of China's ETF options market. To celebrate this anniversary, China will open the ETF options market to qualified foreign investors on October 9, 2025. This is both an opportunity and a challenge. This is the first time in a decade that China has decided to open its ETF options market. The challenge is that foreign investors will face competition from China's 1.08 million options investors. This article will discuss the basic rules and requirements for options trading in China. In addition, we will introduce the application of Confusion Quotient sentiment index in options trading, and analyze how options contract premiums fluctuated significantly after the Fed cut interest rates by 50 basis points on September 18, 2024. Within a month, the Fed's interest rate cut triggered a sharp rise in call options contracts in China's options market, with a maximum profit of 3507.32%, and put option contracts suffered huge losses, with a maximum loss of 99.91%. Our findings prove that China's ETF options market is highly volatile, presenting both opportunities and challenges for foreign investors. Options trading is a double-edged sword, and you need to be cautious when entering the market.

This study explores how foreign competition impacts the capital structure of domestic firms. While import competition is associated with a decrease in domestic firms’ leverage, we propose a novel perspective concerning the positive effect of inward foreign direct investment (FDI) on leverage. FDI competition can boost demand for debt via productivity spillover to domestic firms, and also increase supply of debt by inducing lenders to herd toward foreign investors. Using Chinese firm-level data, we find that the positive effects of industry inward FDI on domestic firms’ leverage are more pronounced in high-tech industries and industries where foreign investors exhibit a high degree of herding behavior. Our instrument variable approach, employing industry exchange rates and import tariffs, supports these findings. Additionally, we reveal that the positive effect of FDI on local firms’ leverage is amplified when the firms have stronger absorptive capacities, receive foreign capital, and experience more human capital transfers from foreign rivals.

This paper examines the different responses of local and foreign investors to host government risk perceptions in the context of extreme events. We develop COVID-19 attention indices that capture attention related to COVID-19 according to China Central Television (CCTV) news program and further construct the government’s risk perception (GRPC) measure about COVID-19. Given the cross-listed AH-shares in China, we find that GRPC caused the extreme movement of stock markets by applying the multi-quantile VaR Granger causality approach. The results show that the reaction of cross-listed stocks in the A-share market is more inflexible than that in the H-share market during the outbreak period of the pandemic, foreign investors follow GRPC as a weather vane than local investors, and both types of investors are more concerned about the pessimism of GRPC. In the period of epidemic normalization, local and foreign investors prefer the optimistic attitude conveyed by the Chinese government.

While previous research has delved into the relationship between political uncertainty and the aggregate cross-border flows of capital, there remains a notable gap in our understanding of how political uncertainty affects firm ownership structure within foreign direct investment (FDI) projects, specifically concerning the intensive margin. In this study, we commence by introducing a stylized model, wherein a risk-averse foreign investor teaming up with a local producer is concerned about the political risk associated with the provision of public goods by the local government. Our analysis demonstrates that the foreign investor, acting as a residual claimant, allocates a greater proportion of revenues to the local partner when local policy conditions are more uncertain. This strategic decision indirectly locks in local government commitment to the international joint venture, thereby mitigating the negative influence of political uncertainty. Subsequently, we test our theoretical framework by employing a unique dataset that encompasses city-level political turnovers and firm-level incentive structures in the context of China. The results unveil robust evidence substantiating that uncertainty arising from local political turnover significantly affects the revenue-sharing agreements between foreign investors and their local partners within the international joint production.

To explore what kinds of roles foreign investors take in a gradually opening financial market, we propose the abnormal holding value ratio (AHVR) of northbound investors among stocks through China’s Stock Connect Mechanism. We find that AHVR positively predicts the expected stock returns and significantly relates to firms’ quality-related fundamental information, especially profitability. Foreign investors learn the firm fundamentals before they invest in the Chinese market, which is different from the trading behavior of domestic individual investors. The AHVR premium is larger among firms with higher attention of analysts who focus on effective information and with lower attention of individual investors who have behavioral bias. In all, the northbound inflows are smart money, which will increase the efficiency of the Chinese market instead of simply chasing stars that only grab investors’ attention.

As a bridge between Chinese mainland and international financial markets, the Stock Connect program allows investors on both sides to gain mutual access. By analyzing how cross-border flows respond to macro-related shocks, we show that compared with possibly homemade foreign investors, genuine foreign investors are more likely affected by the U.S. monetary shocks, the exchange rate risk, the U.S. market performance as well as the cross-market valuation disparity. The paper highlights the importance of profiling different groups of cross-border participants over market integration.

We empirically characterize how China is internationalizing the Renminbi by staggering the entry of different types of foreign investors into its domestic bond market and propose a dynamic reputation model to explain this strategy. Our framework rationalize China’s strategy as trying to build credibility as an international currency issuer while reducing the cost of capital flight. We provide a sufficient statistic to measure countries' reputation over time and show that it can be estimated using micro data on foreign investors' portfolios. We use our framework to explore how countries compete to become a reserve currency provider.

Using a proprietary dataset from 2016 to 2019, we find that order flows from foreign investors, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns in the Chinese market. Most surprisingly, foreign investors possess the ability to process local firm-level public news, whereas their informational advantages regarding global market-level information are relatively muted. Further, the predictive power of foreign investors is particularly strong on large price movement days when the implications of firm-level information is likely most pronounced. Finally, regulatory reforms that generally relax investment access requirements further improve foreign investors’ predictive power

This paper examines whether foreign investor heterogeneity plays a role in stock liquidity on a sample of 27,976 firms from 39 countries for the period from 2003 to 2009. Results show that foreign direct ownership is negatively, while foreign portfolio ownership is positively, associated with various measures of stock liquidity. Furthermore, liquidity also reduces more (less) in firms with larger foreign direct investment FDI (foreign portfolio investment, FPI) during the 2008 market downturn. As predicted by finance theory, foreign investors influence stock liquidity through both trading activity and information channels. Our findings also indicate that the presence of FDI investors improves firm valuation and operating performance even at the expense of an increase in the firm’s cost of capital, suggesting that the value-enhancing benefits from FDI investors’ monitoring efforts outweigh the liquidity costs and high adverse selection premium demanded by less informed investors. In contrast, the positive impacts of FPI ownership on firm performance, as previously documented in existing literature, becomes negative and also not robustly significant after controlling for liquidity.