Stock-return volatility and daily equity trading by investor groups in Korea

Abstract

We examine the short-run relationship between stock-return volatility and daily equity trading by several investor groups in the Korean Stock Exchange. We also investigate whether trade characteristics and trading styles can explain the potential distinct volatility effects of these investor groups. For large stocks, we find that whether a trade is a purchase or a sale and whether it is a contrarian or a momentum trade does not play a role in the relation between volatility and trading. It is the trading of informed institutional investors against non-informed individual investors that drives volatility and produces a negative volatility effect. We further show that net foreign trading has a non-decreasing impact on volatility. Our results are robust to alternative measures of volatility and obtained after controlling for a Monday effect, volatility persistency, total volume and lagged stock returns.

Investors' trading behaviour and stock market volatility during crisis periods: A dual long‐memory model for the Korean Stock Exchange

“…Domestic institutional investors are split into non‐members, whose behaviour also has a destabilizing effect, and members with a stabilizing trading impact. This negative influence is consistent with the results in Umutlu and Shackleton (2015), who find that in Korea trading by informed domestic institutional investors reduces volatility. Inside the institutional non‐members group, we observe that passive investors increase volatility, whereas the stabilizers are the active ones.…”

“…By contrast, the non‐members and individuals destabilize the market. The former result is in line with those of Basak and Pavlova (2013) for the US, while the latter is consistent with those of Foucault et al (2011) for France and Umutlu and Shackleton (2015) for Korea.…”

“…ii) Stabilizing effects of the domestic institutional non‐members' purchases in the global crash period, which is a result of the negative volume link for all six non‐member categories buy side. This is also reflected in the fact that domestic investors' purchases activity lowers volatility in the pre‐crisis period, a finding which is consistent with the results in Che (2018) for Norway, and those in Umutlu and Shackleton (2015) for the Korean market. The financial liberalization, deregulation and integration of the markets is more apparent during the last decade of the GFC period, while in the AFC decade the global integration process was still under development, with increasing foreign ownership.…”

“…Likewise, Bae et al (2011) provide evidence that foreign and domestic institutional investors trade like momentum traders ( H1a, H2a ) while individuals behave like contrarians ( H1b ). Interestingly, Umutlu and Shackleton (2015) point out that uninformed individuals' trading exerts a positive influence on equities volatility ( H2a ), whereas trading by informed domestic institutional investors reduces volatility ( H2b ). They also find that foreign trading mostly drives volatility higher ( H2a ).…”

“…The Korean stock market has attracted the interest of various researchers (Choe et al, 1999, 2005, Jeon and Moffett, 2010, Umutlu and Shackleton, 2015) due to the unique dataset on the different trader types provided by the Korean Stock Exchange. It is undoubtedly one of the fastest growing stock markets (Bae et al, 2011) after it experienced a radical liberal reform of its financial system by the International Monetary Fund (IMF) following the AFC, which led to dramatic capital inflows from foreign institutional investors (Kim et al, 2005).…”