Dual long-memory, structural breaks and the link between turnover and the range-based volatility
AbstractThis paper investigates the issue of temporal ordering of the range-based volatility and turnover volume in the Korean market for the period 1995-2005. We examine the dynamics of the two variables and their respective uncertainties using a bivariate dual long-memory model. We distinguish volume trading before the Asia financial crisis from trading after the crisis. We find that the apparent long-memory in the variables is quite resistant to the presence of breaks. However, when we take into account structural breaks the order of integration of the conditional variance series decreases considerably. Moreover, the impact of foreign volume on volatility is negative in the pre-crisis period but turns to positive after the crisis. This result is consistent with the view that foreign purchases tend to lower volatility in emerging markets--especially in the first few years after market liberalization when foreigners are buying into local markets--whereas foreign sales increase volatility. Before the crisis there is no causal effect for domestic volume on volatility whereas in the post-crisis period total and domestic volumes affect volatility positively. The former result is in line with the theoretical underpinnings that predict that trading within domestic investor groups does not affect volatility. The latter result is consistent with the theoretical argument that the positive relation between the two variables is driven by the uninformed general public.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 16 (2009)
Issue (Month): 5 (December)
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Web page: http://www.elsevier.com/locate/jempfin
Range-based volatility Financial crisis Foreign investors Long-memory Turnover volume;
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