Foreign investors are indeed guilty of destabilizing national financial markets where they are active. This paper analyzes the impact international investors have on the trading stability of financial markets. By calibrating GJR-GARCH models on overlapping, moving windows of daily returns for the German equity index DAX, strong statistical evidence is found that, a large portion of the asymmetric part of the model can be explained by investor composition. Apparently, increased exposure of international investors results in larger asymmetry in the conditional volatility. This strongly links the foreign investor to increased market volatility during adverse market information inflows. Thus, the trading behavior of foreign investor adds destabilizing influences to the financial market.

The question whether foreign investors adversely affect the stability of financial markets has been asked many times with different answers. Often, foreign investors were blamed for the dramatic difficulties of the East Asian countries, and the collapse of their stock markets in the late 1990's. Stiglitz (1998) called for greater regulation of capital flows, arguing that their economies are vulnerable to vacillations in international flows. Dornbusch and Park (1995) charge foreign investors to cause stock price overreaction to fundamentals due to positive feedback trading and herding. Choe, Kho and Stulz (1998) find empirical evidence for positive feedback trading and herding by foreign investors, but cannot link them to destabilizing effects on the Korean stock market during 1996 and 1997. Radelet and Sachs (1998) attribute the East Asian economic crisis to financial panic. The question on destabilizing effects stemming from foreign investors activity is crucial for understanding the economical benefits, or indeed disservices, from opening markets to investors from all countries.

Whether foreign investors destabilize national markets has been analyzed on a micro level by following stock prices during periods of foreign order imbalances. Especially, Choe, Kho and Stulz (1998) use this approach and cannot single out foreign investors being responsible for destabilizing impacts on the market's trading routine.

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