Investors' Trading Behaviour and Stock Market Volatility During Crisis Periods: A Dual Long-Memory Model for the Korean Stock Exchange

Guglielmo Maria Caporale,Stavroula Yfanti,Menelaos Karanasos,Aris Kartsaklas

doi:10.2139/ssrn.3507255

Abstract

This study examines the impact of investors’ buy and sell trades on Korean stock market volatility across two crisis events, the Asian crisis of 1997 and the 2008 global financial crash. We investigate the trading behaviour of domestic vs. foreign and institutional vs. individual investors. Our results suggest that the buy and sell trades have an asymmetric effect on volatility that depends on the type of investor trading and on the phase of the business cycle. Buy orders appear to be more informative than sell orders since they mostly lower volatility in the pre-crisis periods, while sell and post-crisis buy trades affect volatility positively regardless of who trades (institutional or individual investors) and on what information (member, non-member). Most importantly, decomposing total buy and sell trades into trader-type categories reveals that some institutional investors are more informed traders that stabilize the market compared to individuals that always increase volatility. Foreign investors reduce volatility with their purchases and total trading activity in the whole Asian crisis sample, but only in the pre-crisis period before the recent global financial turmoil.

Highlights

The relationship between trading volumes and volatility has been analysed in numerous studies in the areas of behavioural finance and financial econometrics; these have shown that investors' trading activity affects stock market volatility considerably, which has important implications for financial regulators
There are four main findings concerning the causal relationship between volume and volatility for the global financial crisis (GFC) vis-à-vis the Asian financial crisis (AFC): i) Concerning the signs, for the pre-crisis period and the total sample, from the six different institutional nonmembers separately, we observe stabilizing effects from the passive nonmembers, whereas the total trades of the active ones increase volatility, which is the opposite effect compared to that implied by the AFC signs
This paper has examined the long-run dynamics of stock market volatility using a dual long-memory model and it has investigated the effects of buy and sell trades by trader type in the Korean Stock Exchange during two crisis periods, the Asian one and the global crash

Summary

| INTRODUCTION

The relationship between trading volumes and volatility has been analysed in numerous studies in the areas of behavioural finance and financial econometrics; these have shown that investors' trading activity affects stock market volatility considerably, which has important implications for financial regulators. We further examine whether the trader type buy and sell effects on volatility are robust to the AFC, which hit the major Asian economies at the end of 1997, and had repercussions until the end of 1998 It brought about changes in the Korean Stock Exchange such as abolishing the foreign ownership ceiling, allowing free movement of the profit on investment and providing transparent financial reports. These developments, together with the introduction of index futures/options trading during the same period, raise interesting research questions about the impact of buy and sell trades on volatility. In the case of Korea, the share of foreign trading activity in total stock market volume and the foreign stock ownership increased significantly in the post-2000 period

| Estimation methodology

| Summary

| CONCLUSIONS

Findings

Source