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Abstract: Using monthly foreign flows data on Istanbul Stock Exchange (ISE) and employing a structural VAR model, we analyze the interaction between foreigners'' trading and emerging stock returns. In contrast to most of the available theory and repeated previous findings on other markets, foreign investors negative-feedback-trade with respect to past local returns in ISE, however only in rising markets and especially under macroeconomic instability. Net foreign flows forecast future market returns, but not individual stock returns. Price impacts are permanent, suggesting that foreigners'' trading incorporates information. Overall, results reject previous conclusions that foreigners are uninformed positive feedback traders: rather, they are a heterogeneous group dominated by sophisticated investors able to rationally adjust their trading style in line with the market''s prevailing characteristics. [Copyright &y& Elsevier]