The volume–volatility relationship and the opening of the Korean stock market to foreign investors after the financial turmoil in 1997 |
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Authors: | J?Kim A?Kartsaklas Email author" target="_blank">M?KaranasosEmail author |
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Institution: | (1) Gangwon Development Research Institute, Chuncheon-si, Korea;(2) University of York, York, UK;(3) Business School, Brunel University, Uxbridge, Middlesex, UB3 3PH, UK |
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Abstract: | 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.
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Keywords: | Bidirectional feedback Financial turmoil Foreign investors Stock volatility Trading volume |
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