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Emerging countries’ economies are dependent on foreign capital inflows. For policy makers and researchers of particular interest is to understand the nature of these flows and their impact on the domestic capital market. The first significant foreign inflows entered the Macedonian Stock Market at the end of 2004, and stock prices were increased. It was general belief among the investors that foreigners are driving the prices on the Macedonian Stock Market. This study examines the influence of foreign investors’ trades on stock returns in Macedonia using base broadening and price pressure hypotheses. Strong evidence consistent with the base-broadening hypothesis shows that 1% of monthly net inflows as a percentage of last month market capitalization is connected with 7% rise in monthly returns on the Macedonian stock market. The findings do not support the price pressure hypothesis, so the rise in the prices is permanent.
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