The volume–volatility relationship and the opening of the Korean stock market to foreign investors after the financial turmoil in 1997

This paper investigates the stock volatility–volume relation in the Korean market for the period 1995–2001. Previous research examined the impact of liberalization on the Korean stock market up to the period before the financial turmoil in 1997 although the crucial measures of the liberalization were introduced after the crisis under the International Monetary Fund program. One of the major features of the reformation was the financial opening to foreign investors. In this study the ‘total’ trading volume is separated into the domestic investors’ and the foreign investors’ volume. By doing this the information used by two different groups of traders can be separated. Further, in addition to the absolute value of the returns and their squares we use the conditional volatility from a GARCH-type model as an alternative measure of stock volatility. The following observations, among other things, are noted about the volume–volatility causal relationship. First, for the entire period there is a strong bidirectional feedback between volume and volatility. In most cases this causal relationship is robust to the measures of volume and volatility used. Second, volatility is related only to ‘domestic’ volume before the crisis whereas after the crisis a bidirectional feedback relation between ‘foreign’ volume and volatility begins to exist. In other words, ‘foreign’ volume tends to have more information about volatility in recent years, which suggests the increased importance of ‘foreign’ volume as an information variable.      

Foreign Ownership and Volatility Dynamics of Indonesian Stocks

This note explores how foreign ownership and participation affect the volatility dynamics of individual stocks in Indonesia. After controlling for size and turnover, we show that stocks with high foreign holdings have greater volatility persistence and lead other stocks in the daily volatility changes. The finding holds during and after the Asian financial crisis, and is consistent with domestic investors mimicking foreign trading.      

Intraday trading volume and international spillover effects

The objective of this paper is to explore whether lagged trading activity in one market contributes to the return and volatility process in other markets, using 5-min concurrent data from German and British equity market. Our results lend support to our initial premise that if international investors have access to the same information set as domestic traders, then after observing foreign trading activity, market makers adjust prices to reflect their expectation of the security value, conditional upon all available information, including prior trades. Our findings clearly indicate that intraday trading volume contains predictive power for cross-border return and volatility processes. Moreover, these volume effects are found to be asymmetric in the sense that the impact of positive volume changes upon foreign stock market volatility is greater than is the impact of negative changes.     

Volatility spillover in the foreign exchange market: the Indian experience

We find evidence of significant volatility co-movements and/or spillover from different financial markets to the forex market in India. Among a large number of variables examined, volatility spillovers from domestic stock, government securities, overnight index swap, Ted spread and international crude oil markets to the foreign exchange market are found to be significant. There is evidence of asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis volatility indicate that the reform measures and changes in financial markets microstructure during the crisis period had significant impact on volatility spillover. During the post-crisis period, the lagged volatility component that represents persistent or fundamental changes had significant spillover effect on forex volatility, rather than the temporary shocks component. There is evidence of a decline in the asymmetric response in the forex volatility during the post-crisis period in India.     

Local and spillover shocks in implied market volatility: evidence for the U.S. and Germany

The occurrence and the transmission of large shocks in international equity markets is of essential interest to the study of market integration and financial crises. To this aim, implied market volatility allows to monitor ex ante risk expectations in different markets. We investigate the behavior of implied market volatility indices for the U.S. and Germany under a straightforward mean reversion model that allows for Poisson jumps. Our empirical findings for daily data in the period 1992 to 2002 provide evidence of significant positive jumps, i.e. situations of market stress with positive unexpected changes in ex ante risk assessments. Jump events are mostly country-specific with some evidence of volatility spillover. Analysis of public information around jump dates indicates two basic categories of events. First, crisis events occurring under spillover shocks. Second, information release events which include three subcategories, namely—worries about as well as actual—unexpected releases concerning U.S. monetary policy, macroeconomic data and corporate profits. Additionally, foreign exchange market movements may cause volatility shocks.     

Cross‐Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area

We provide evidence for the euro area of spillovers from foreign public debt auctions into domestic secondary‐market auction cycles. We also confirm existing evidence of such spillovers from domestic issues into the domestic secondary market. Consistent with a theory of primary dealers’ limited risk‐bearing capacity, we find that auction cycles from domestic issues are stronger during the recent crisis period, whereas cross‐border effects are stronger in the precrisis period, but this evidence is not strong. This finding likely reflects the opposing effects of reduced sovereign bond market integration during the crisis and higher yield covariances caused by more market volatility.     

Discount rate changes,stock market returns,volatility, and trading volume: Evidence from intraday data and implications for market efficiency

We examine the effect of discount rate changes on stock market returns, volatility, and trading volume using intraday data. Equity returns generally respond negatively and significantly to the unexpected announcements; however, the effect of expected changes on equity returns is insignificant. Furthermore, our results indicate that equity prices respond to announcements within the trading period/hour after the information release. An indication of a return reversal is too small to cover the full transaction costs. Unexpected discount rate changes also contribute to higher market volatility although the volatility is short-lived. Similarly, unexpected changes in discount rates induce larger trading volume while expected changes do not. Abnormal trading volume occurs only in period t. Our results also support the notion that unexpected changes in the discount rates impact market returns irrespective of the Federal Reserve operating procedures.     

Short-Term External Debt and Foreign Exchange Rate Volatility in Emerging Economies: Evidence from the Korea Market

Abstract:

We empirically analyze the main determinants of foreign exchange rate (FX) volatility in emerging market economies using the data of Korea corporations and financial institutions. We find that short-term external debt is more important than trading volume of foreign investors in explaining FX volatility. Our results suggest that short-term debt-controlling measures, such as a tax levy on short-term borrowing, can be more effective in moderating FX volatility than can the measures affecting the trading volume, such as a Tobin tax.     

Stock index futures hedging in the emerging Malaysian market

The paper investigates hedging effectiveness of dynamic and constant models in the emerging market of Malaysia where trading information is not readily available and market liquidity is lower compared to the developed equity markets. Using daily data from December 1995 to April 2001 and bivariate GARCH(1,1) and TGARCH models, the paper uses differing variance–covariance structures to obtain hedging ratios. Performance of models is compared in terms of variance reduction and expected utility levels for the full sample period as well as the three sub-periods which encompass the Asian financial crisis and introduction of new capital control measures in Malaysia. Findings show that rankings of the hedging models change for the in-sample period depending on evaluation criteria used. TGARCH based models provide better hedging performance but only in the period of higher information asymmetry following the imposition of capital controls in Malaysia. Overall, despite the structural breaks caused by the Asian financial crisis and new capital control regulations, out of sample hedging performance of dynamic GARCH models in the Malaysian emerging market is as good as the one reported for the highly developed markets in the previous literature. The findings suggest that changes in the composition of market agents caused by large scale retreat of foreign investors following the imposition of capital control regulations do not seem to have any material impact on the volatility characteristics of the Malaysian emerging market.     

Periodic Information Asymmetry and Intraday Market Behaviour: An Empirical Analysis

The model of Foster-Viswanathan (1990, FV) predicts that information heterogeneity among market participants generates patterns in volume, trading costs and volatility. In the Italian Treasury bond market, periodic information asymmetry is related to the arrival of block orders from international investors, which cluster soon after the opening of the market and, respectively, of the US market. Our evidence is that volume is lower and trading costs are higher after the two openings, consistent with FV. We find only weak evidence that volatility behaves as implied by the model.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam

This article investigates the impact of foreign investors' trading on stock returns in Vietnam, a key emerging market. We utilize a time series data set of foreign investors' trading volume and market returns of the Ho Chi Minh City stock exchange over an extended time frame before and after global financial crisis. The results indicate that foreign investors are positive feedback traders in Vietnam stock market. The findings also reveal the timing ability and trading strategy of foreign investors. The paper offers strong implications for market participants and portfolio investment.     

Taming polysemous signals: The role of marketing intensity on the relationship between financial leverage and firm performance

This study traces the degree of integration and volatility spillover effect between the Pakistani and leading foreign stock markets by analyzing the Meteor shower hypothesis. Daily data are used from nine worldly equity markets (KSE 100, NIKKEI 225, HIS, S&P 500, NASDAQ 100, DOW JONES, GADXI, FTSE 350 and DFMGI) for the period of 2005 to 2014. First, we used the whole data set and after that we split data set into two subsets, First subset of data contains the era of global financial crisis of 2008 from 2005 to 2009 and Second subset is after global financial crisis time period from 2010 to 2014 (The global crisis prevailed till end of 2009). By following the Hamao et al. (1990) technique the univariate GARCH type models are employed to explore the dynamic linkages between Pakistani and leading foreign stock markets. The results from whole data set illustrate that there is mixed co‐movements between leading foreign stock markets and Pakistani stock market. The results from both subsets provide an evidence that there is a unidirectional mean and volatility spillover effect from S&P 500, NASDAQ 100, DJI and DFMGI to KSE 100. Also we found bidirectional spillover effect between DFMGI and KSE 100 from both subsets of data. We concluded that there is only one indirect linkage through which may the information transmitted to KSE 100. This linkage is developed due to the co‐movement among KSE 100, DFMGI and NASDAQ 100 in crisis period. This integration between these markets may provide a sign of indirect linkage. It also exhibits the volatility in Pakistan stock market returns is instigated through direct effects as well as indirect effects. Our study brings important conclusions for financial institutions, portfolio managers, market players and academician to diagnose the nature and level of linkages between the financial markets.     

Multimarket trading and liquidity: a transaction data analysis of Canada–US interlistings

We use transaction data for Toronto Stock Exchange (TSE) listed stocks to examine the impact on trading costs of the decision to interlist on a US exchange. We measure trading costs using both ‘posted’ bid-ask spreads and ‘effective’ bid-ask spreads that measure actual transaction prices relative to standing bid-ask quotes. After controlling for price level, trade size and trading volume effects, we find that overall posted and effective spreads in the domestic (TSE) market decrease subsequent to the interlisting. However, the decrease in trading costs is concentrated in those TSE stocks that experience a significant shift of total trading volume (TSE and US) to the US exchange after listing. We interpret this result in the context of theories of multimarket trading as a competitive response by TSE market makers to the additional presence of US market makers.     

Structural effects and spillovers in HSIF, HSI and S&P500 volatility

We adopt a BEKK-GARCH framework and employ a systematic approach to jointly examine structural breaks in the Hong Kong cash index and index futures volatility and volatility spillovers from the S&P 500 cash and futures. Multiple switching dummy variables are included in the variance equations to test for any structural changes in the autoregressive volatility structure due to the events that have taken place in the Hong Kong market. Abolishment of the up-tick rule, increase of initial margins and electronic trading of the Hang Seng Index Futures (HSIF) are found to have significant impact when US market spillovers are excluded from a restricted model. Volatility spillovers from the US market are found to have a significant impact and account for some mis-specification in the restricted model.     

The dynamic relationship of volatility,volume, and market depth in currency futures markets

This study examines the dynamic interactions among return volatilities, volume, and market depth for five currency futures markets. We use vector autoregressive analysis (VAR) to identify not only the nature of these relations but also the direction and speed of the information flow between variables. We find that return volatility is subject to strong reversal effects from trading volume and market depth. The results also indicate that the volatility appears to have predictive power on volume but not on market depth. Furthermore, this study finds that volume and depth are not endogenously determined, as their lead–lag relationship is asymmetrical. We also observe an increasing trend of integration between offshore and domestic information that affects the movement of currency futures prices.     

The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience

Since the popular uprising of January 2011, a series of momentous events has rocked Egypt’s political order, jeopardising the country’s economic and financial stability. This study examines the role of foreign capital flows in the volatility of the Egyptian equity market, and whether this role has changed due to the recent domestic political unrest. These issues are empirically addressed in the context of GMM estimation. The results suggest that, unlike those of foreign individual investors, trades of foreign institutional investors contribute to market fluctuations, whether prior to or following the January 2011 uprising. Sell trades by foreign individual and institutional investors exert a significant influence on volatility. Further, when volume is split into its anticipated and unanticipated components, the results show that surprises in trading activity by either group tend to exacerbate volatility in periods of calm and turmoil. These findings are broadly insensitive to volatility measures and robust, even after controlling for a variety of relevant determinants of market volatility. The evidence documented in this study provides important implications for policy markers.     

Price dynamics in refined petroleum spot and futures markets

This article characterizes the spot and futures price dynamics of two important physical commodities, gasoline and heating oil. Using a non-linear error correction model with time-varying volatility, we demonstrate many new results. Specifically, the convergence of spot and futures prices is asymmetric, non-linear, and volatility inducing. Moreover, spreads between spot and futures prices explain virtually all spot return volatility innovations for these two commodities, and spot returns are more volatile when spot prices exceed futures prices than when the reverse is true. Furthermore, there are volatility spillovers from futures to spot markets (but not the reverse), futures volatility shocks are more persistent than spot volatility shocks, and the convergence of spot and futures prices is asymmetric and non-linear. These results have important implications. In particular, since the theory of storage implies that spreasd vary with fundamental supply and demand factors, the strong relation between spreads and volatility suggests that these fundamentals — rather than trading induced noise — are the primary determinants of spot price volatility. The volatility spillovers, differences in volatility persistence, and lead-lag relations are consistent with the view that the futures market is the primary locus of informed trading in refined petroleum product markets. Finally, our finding that error correction processes may be non-linear, asymmetric, and volatility inducing suggests that traditional approaches to the study of time series dynamics of variables that follow a common stochastic trend that ignore these complexities may be mis-specified.     

Public information releases, private information arrival and volatility in the foreign exchange market

This paper estimates the impact of market activity and news on the volatility of returns in the exchange market for Japanese Yen and US dollars. We examine the effects of news on volatility before, during and after news arrival, using three categories of news. Market activity is proxied by quote arrival, separated into a predictable seasonal component and an unexpected component. Results indicate that both components of market activity, as well as news releases, affect volatility levels. We conclude that both private information and news effects are important determinants of exchange rate volatility. Our finding that unexpected quote arrival positively impacts foreign exchange rate volatility is consistent with the interpretation that unexpected quote arrival serves as a measure of informed trading. Corroborating this interpretation is regression analysis, which indicates that spreads increase in the surprise component of the quote arrival rate, but not in the expected component. The estimated impact of a unit increase in unexpected quote arrival and the range of values observed for this variable imply an important volatility conditioning role for informed trading.     

MENA stock market volatility persistence: Evidence before and after the financial crisis of 2008

The global financial crisis began with a financial meltdown in the United States in early 2008 and then it had spread to the rest of the world. In this paper we test whether the MENA equity market volatility presents a different behavior before and after the financial crisis of 2008. Using long range dependence techniques we test for long memory in the returns, absolute and squared returns of the MENA equity markets. We subject the series to unit root tests that allow for structural breaks and use the Bai and Perron (1998, Econometrica, 66, 47; 2003a, J. Appl. Econometrics, 6, 72; 2003b, Econometrics J., 18, 1) to test for multiple breaks in the mean returns. The results indicate that the volatility measures represented by absolute and squared returns show evidence of long memory for the full and subsample periods, while the returns show a weak evidence of long memory. Considering the shift dates and corresponding to the 2008 financial crisis, the returns and volatility measures display less evidence of long memory in the after crisis period as opposed to the before crisis period. The change in the returns and volatility dynamics of these markets was due to financial and economic conditions that took place in the MENA region after the crisis.