Empirical studies on microstructure in the Korean stock market

Abstract

Since the market crash in 1987, the academics and the policy makers have been very concerned with the microstructure of the stock market for the market stabilization. There are some special microstructure in the Korean stock market. The Korea Stock Exchange (KSE) provides a unique experimental setting for investigating the effects for the market stabilization. The special features for investigating are as follows. First, the KSE employs an unique periodic clearing trading mechanism, known as the Dongsihoka, for the afternoon closing of electronically traded stocks. With the increases in both foreign and domestic institutional investors, this periodic clearing procedure integrated with continuous trading would be helpful for stock market stabilization. Second, there is price limit system which limits a daily stock price movements. It is the most common and perhaps the most primitive type of circuit breakers which have been recommended as the mechanisms for the market stabilization. Last, transparency of limit order book has been increased as the progress of automation in the KSE. The transparency is the degree to which trading information is made publicly available, so, in the transparent market, the probability of the market crash may be reduced. The studies provide new empirical evidences related to the Korean stock market microstructure, which give an interesting results to the academics and the policy makers in Korea as well as in the whole world. Chapter II investigates the unique trading mechanism of the KSE and its intraday behavior of stock price volatility. The evidence from this study indicates that the introduction of an additional clearing procedure at the afternoon closing makes price discovery process more efficient than before from the viewpoint of the stock market volatility. Hence, such trading mechanisms can be applied to emerging stock markets as well as developed stock market. In addition, based on intraday analysis, stock price volatilities ...