Political elections and foreign investor trading in South Korea's financial markets

Abstract

This article investigates the relationship between foreign investors' trading behaviour and political election events in South Korea and the effect of the relationship on the financial markets via a bivariate GARCH (1,1) model analysis. The empirical results show that the KOSPI 200 index return (total trading volumes of spot) and the derivatives volume have a negative (positive) relationship for foreign investors. South Korea shifted to a free floating exchange rate system, however, it did not have an effect on foreign investors' trading behaviour. In particular, foreign investors showed significant decrease in trading options contracts during the parliamentary election periods and the parliamentary elections stabilized derivatives trading volatility. It is evident from the results that the presidential elections create far more financial uncertainty in comparison to parliamentary elections.

Country-Level Governance Quality and Stock Market Performance of GCC Countries

“…Political events within a country as well as its external political relations influence the level of stock market returns. Chiu, Chen and Tang (2005) show that foreign investors' reactions to the electioneering events in South Korea showed significant impact on the stock market. Political events have a strong significant association with the volume of trading activities and market returns (Frey & Waldenstrom, 2004;Bailey, Heck & Wilkens, 2005;Aktas & Oncu, 2006;Beaulieu, Cosset, & Essaddam, 2006).…”

The Link between Quality of Governance and Stock Market Performance: International Level Evidence

“…Jorion and Geotzmann (1999) derived that political events had an interruption in the market transactions. Chiu et al (2005) proved that political elections in South Korea changed the behavior of foreign investors in financial markets. Beaulieu et al (2006), Aktas and Oncu (2006), Bailey et al (2005) and Frey and Waldenstrom (2004) argued that political events had a strong effect on the returns and trading volume of the financial markets.…”

“…They concluded that the whole market and the overall industry did not show any significant response to all events. Chiu et al (2005) studied the behavior of foreign investors in the four elections of South Korea. The results showed that negative relationship exists between KOSPI 200 index return and the volume of both future and option contracts.…”

Electoral information in developed stock market: testing conditional heteroscedasticity in the market model

“…Other researches have tracked financial market performance in relation to elections (Easaw and Garratt, 2000;Steeley, 2003;Bru¨ggelambert, 2004;Chiu et al, 2005). During election campaigns, the political parties provide economic policies that are acceptable to voters, and competition among parties generally promotes economic development (Pantzalis et al, 2000).…”