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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Jieun Lee & KeeH.Chung, 2017. "The Effect of Market Volatility on Liquidity and Stock Returns in the Korean Stock Market," Working Papers 2017-18, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1718
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    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2017-18.pdf
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    Citations

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    Cited by:

    1. Smail Tigani & Hasna Chaibi & Rachid Saadane, 2019. "Gaussian Mixture and Kernel Density-Based Hybrid Model for Volatility Behavior Extraction From Public Financial Data," Data, MDPI, vol. 4(1), pages 1-11, January.

    More about this item

    Keywords

    Market volatility; VIX; Price impact; Bid-ask spread; Liquidity; Stock returns; Investor type; Financial crisis;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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