Institutional investors and stock market volatility. Evidence from Korea

ABSTRACT

This article examines the impact of institutional investors on return volatility in Korea stock market from 4 January 2000 to 15 September 2017 using actual trading data. We find that net purchases of institutions increase the market level of volatility but find no evidence that trades by institutional investors had a destabilizing impact on Korea’s equity market over our sample period.

KEYWORDS:

• Trading
• institutional investors
• stock-return volatility

JEL CLASSIFICATION:

• C22
• G15

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Wang (2007) also employed daily institutional trading data as a control variable while investigating the impact of foreign trading on market volatility in Indonesia and Thailand.

² This way, the effect of investor trading on volatility is potentially measured in a better way compared to the buy–sell imbalance measure.

³ Market returns are computed by taking the first difference of the log daily closing values of the all-share index in local currency, adjusted for stocks splits and dividend payments.:

⁴ Given the well-known fat-tail behaviour in equity returns, we use Student’s t-distribution rather than the Gaussian error distribution. Indeed, the use of t-distributed errors clearly improved the fit of our model. Log-likelihood is considerably higher with t-distributed errors compared to normal distribution.