Essays on market microstructure and market integration

Abstract

This dissertation consists of four essays on market microstructure and market integration. The first essay studies the beneficial effect of foreign trading on information efficiency in the Korean stock market, and the second essay examines what generates the symmetric order flow and how it affects the stock price in the Korean stock market. The third essay investigates the momentum effect in the international commodity futures markets, and the fourth essay investigates the effective way to combine the momentum strategies in the US stock and commodity futures markets. The first essay examines whether foreign investors improve the transmission of global and local market information on individual stock prices in the Korean stock market. We find that foreign trading significantly reduces delays in local and global information dissemination. We find a more significant relation between foreign trading and global information delay for firms with high levels of international trading activity. This indicates that foreign investors are more advantaged than local investors with respect to global information. In the second essay, we employ Duarte and Young’s (2009) model that decomposes probability of informed trading (PIN) into the adjusted PIN (AdjPIN) and probability of trading caused by symmetric order flow shocks (PSOS). Using transaction data with trader types and initiator information, we find that PSOS is negatively priced and the negative effect of PSOS comes from difference of opinion, and domestic individual investors mainly generate symmetric order flow because of the difference of opinion. The third essay examines whether the commodity futures momentum can predict the business cycle in the US, China, the UK, Japan, and India. We find the significant and negative predictability of the commodity futures momentum while the basis factor of the commodity futures markets shows insignificant results. Moreover, we find that the commodity futures momentum cannot be fully explained by the traditional risk factors, macroeconomic variables, or the commodity sector momentum. The last essay proposes an improved momentum strategy that efficiently combines the stock momentum and the commodity futures momentum. Using the numeraire portfolio approach, we first find the negative (positive) weights on the commodity futures losers (winners) are optimal for log-utility investors. We also find a positive certainty-equivalent gain from the access to the commodity futures portfolios, and selling the commodity futures loser instead of selling the stock loser improves the profits. Based on these results, we construct a joint strategy―i.e., buying the stock winner and selling the commodity futures loser―and confirm the improved performance.