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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Acknowledgements
We are indebted to two anonymous referees for their very useful comments. We greatly appreciate Marika Karanassou and participants at the AUEB Economics conference (Crete, 2002), Financial Economics conference (Brunel University, 2006), International Symposium of Forecasting (Santander, 2006), ESEM conference (Vienna, 2006) and 4th Oxmetrics user conference (Cass Business School, 2006) for their valuable suggestions. We have also benefited from the comments given by participants at the seminars held in the Department of Economics at the University of Birmingham and at the University of Macedonia.
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Kim, J., Kartsaklas, A. & Karanasos, M. The volume–volatility relationship and the opening of the Korean stock market to foreign investors after the financial turmoil in 1997. Asia-Pacific Finan Markets 12, 245–271 (2005). https://doi.org/10.1007/s10690-006-9024-7
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DOI: https://doi.org/10.1007/s10690-006-9024-7