Market structure and stock price behavior in the Korea stock market (implied spread in the Korea stock market)

Abstract

This paper investigates stock price behavior in the Korea Stock Market. lntraday, daily and weekly implied spreads arc estimated lo investigate whether similar negative serial covariance is observed in the Korea stock market Iike the U.S. dealer market. The Korea stock market operates as an auction market where buy or sell orders directly interact with each other. Bid and ask prices are not posted like dealer markets. This study generalizes Rail's model which can be applied to auction markets. Empirical results in the Korean auction market indicate that in general implied spread estimates are positive and patterns of implied spread exhibit the similar characteristics as implied spreads in the U.S. dealer market. Weekly implied spread estimates are larger than daily implied spread estimates. Mean implied spread estimates of small firms are greater than those of large firms. Implied spread is negatively correlated with trading volume. These empirical results in the auction market does not preclude the possibility that the pattern of implied spread in the U.S. dealer market may be mainly attributed to the liquidity risk or trading friction which is related to trading thinness or firm sizes, rather than bid-ask bound itself. This paper also compares stock price behavior between the call auction transactions and the continuous auction transactions in the Korea stock market. Empirical patterns of implied spread and other stock price behavior indicate that different market structures might not lead to differences in the short run stock price behavior.