Market microstructure and return volatility: evidence from the Korean stock market

Abstract

This Paper analyzes the behavior of return and volatility computed from the opening and closing prices of Korea Stock Exchange (KSE) stocks and examines the relevancy of alternative explanations for the greater volatility at the market open in light of some unique microstructure features of the KSE. Specifically, this paper investigates ratios of variances of open-to-open relative to close-to close returns, the correlation of returns for adjacent trading and non-trading periods for the KSE, and their relationships to trading activity. Additionally, this paper examines the impact of the global trading of cross-listed Korean stocks on their opening volatility. Through such analysis, this paper finds that the trading method-based explanation, market maker-related explanation, and price-limit-based explanation are not relevant to the case of KSE-listed stocks. The evidence from the Korean market supports the explanation offered by Amihud and Mendelson (1991), who contend that greater volatility at the market open is attributed to the preceding overnight non-trading period.