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The Effect of Market Volatility on Liquidity and Stock Returns in the Korean Stock Market

Jieun Lee () and KeeH. Chung ()
Additional contact information
Jieun Lee: Economic Research Institute, The Bank of Korea
KeeH. Chung: Department of Finance, School of Management, University at Buffalo, The State University of New York

No 2017-18, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This study analyzes the effect of market volatility on stock returns using data from the Korean stock market from January 1, 2004 to December 31, 2014. We show that unexpected increases in market volatility accompany decreases in both stock returns and liquidity and the effect of volatility shock on stock returns is greater for stocks with more domestic or foreign institutional trading. Individual investors mitigate the negative effect of volatility shock on stock returns. The interaction effect of market volatility and liquidity on stock returns is stronger for stocks with more foreign institutional trading. We also document some evidence of asymmetric effects of market volatility on stock returns that are related to whether trades are buyer or seller-initiated.

Keywords: Market volatility; VIX; Price impact; Bid-ask spread; Liquidity; Stock returns; Investor type; Financial crisis (search for similar items in EconPapers)
JEL-codes: G10 G32 G34 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2017-06-20
New Economics Papers: this item is included in nep-cfn and nep-mst
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Citations: View citations in EconPapers (1)

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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2017-18.pdf Working Paper, 2017 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bok:wpaper:1718

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