Information Transmission between Large and Small Stocks in the Korean Stock Market
Little attention has been paid to information
transmission between the portfolios of large stocks and small stocks in the Korean stock market. This study investigates the return and volatility transmission mechanisms between large and small stocks in
the Korea Exchange (KRX). This study also explores whether bad news in the large stock market leads to a volatility of the small stock
market that is larger than the good news volatility of the large stock market. By employing the Granger causality test, we found
unidirectional return transmissions from the large stocks to medium
and small stocks. This evidence indicates that pat information about
the large stocks has a better ability to predict the returns of the medium and small stocks in the Korean stock market. Moreover, by using the
asymmetric GARCH-BEKK model, we observed the unidirectional relationship of asymmetric volatility transmission from large stocks to
the medium and small stocks. This finding suggests that volatility in
the medium and small stocks following a negative shock in the large
stocks is larger than that following a positive shock in the large stocks.
[1] A. W. Lo, and A. C. MacKinlay, "An econometric analysis of nonsynchronous trading," Journal of Econometrics, vol. 45, pp. 181-211. 1990a
[2] A. W. Lo, and A. C. MacKinlay, "When are Contrarian profits due to
shock market overreaction?" Review of Financial Studies, vol. 3, 175-205. 1990b.
[3] J. Boudoukh, M. Richardson, and R. Whitelaw, "A tale of three schools:
Insights on autocorrelations of short-horizon returns," Review of Financial Studies, vol. 7, pp. 537-573, 1994.
[4] S. G. Badrinath, J. R. Kale, and T. H. Noe, "Of shepherds, sheep and the
cross-autocorrelations in equity returns," Review of Financial Studies, vol.
8, pp. 401-430, 1995.
[5] G. McQueen, M. Pinegar, and S. Thorley, "Delayed reaction to good
news and the cross-autocorrelation of portfolio returns," Journal of
Finance, vol. 51, pp. 889-919, 1996.
[6] J. Campbell, A. Lo, and A. MacKinlay, The Econometrics of Financial
Markets, New Jersey: Princeton University Press, 1997.
[7] T. Mech, "Portfolio autocorrelation," Journal of Financial Economics,
vol. 34, pp. 307-344. 1993.
[8] K. Chan, "Imperfect information and cross-autocorrelation among stock
prices," Journal of Finance, vol. 48, pp. 657-684, 1993.
[9] M. Grinblatt, S. Titman, and R. Wermers, "Momentum investment
strategies, portfolio performance, and herding: A study of mutual fund
behavior," American Economic Review, vol. 85, pp. 1088-1105, 1995.
[10] D. Keim and A. Madhavan, "Anatomy of the trading process: Empirical
evidence on the behavior of institutional traders," Journal of Financial Economics, 37, 371-398,
[11] S. A. Ross, "Information and volatility: The no-arbitrage martingale
approach to timing and resolution irrelevancy," Journal of Finance, vol.
44, pp. 1-17, 1989.
[12] J. Conrad, M. N. Gultekin, and G. Kaul, "Asymmetric predictability of
conditional variances," Review of Financial Studies, vol. 4, pp. 597-622,1991.
[13] I. Hasan, and B. B. Francis, "Macroeconomic factors and the asymmetric
predictability of conditional variances," European Financial
Management, vol. 4, pp. 207-230, 1998.
[14] R. D. F. Harris, and A. Pisedtasalasai, "Return and volatility spillover
between large and small stocks in the UK," Journal of Business Finance
& Accounting, vol. 33, pp. 1556-1571, 2006.
[15] A. Alsubaie, and M. Najand, "Trading volume, time-varying conditional
volatility, and asymmetric volatility spillover in the Saudi stock market,"
Journal of Multinational Financial Management, vol. 19, pp. 139-159,2009.
[16] A. Pardo, and H. Torr├│, "Trading with asymmetric volatility spillovers,"
Journal of Business Finance & Accounting, vol. 34, pp. 1548-1568, 2007.
[17] Karmakar, M., "Information transmission between small and large Stock in the national stock exchange in India: An empirical study," Quarterly
Review of Economics and Finance, vol. 50, pp. 110-120, 2010.
[18] S. Johansen, "Estimation and hypothesis testing of cointegration vectors
in Gaussian vector autoregressive models," Econometrica, vol. 59, pp.
1551-1580, 1991.
[19] C. W. J. Granger, "Investigating causal relations by econometric models
and cross-spectral methods," Econometrica, vol. 37, pp. 424-438, 1969.
[20] R. F. Engle, and K. F. Kroner, "Multivariate simultaneous generalized
ARCH," Econometric Theory, vol. 11, pp. 122-150, 1995.
[21] R. F. Engle, and V. K. Ng, "Measuring and testing the impact of news on
volatility," Journal of Finance, vol. 48, pp. 1749-1778, 1993.
[22] L. R. Glosten, R. Jagannathan, and D. E. Runkle, "On the relation
between the expected value and the volatility of the nominal excess return
on stocks," Journal of Finance, vol. 48, pp. 1779-1801, 1993.
[1] A. W. Lo, and A. C. MacKinlay, "An econometric analysis of nonsynchronous trading," Journal of Econometrics, vol. 45, pp. 181-211. 1990a
[2] A. W. Lo, and A. C. MacKinlay, "When are Contrarian profits due to
shock market overreaction?" Review of Financial Studies, vol. 3, 175-205. 1990b.
[3] J. Boudoukh, M. Richardson, and R. Whitelaw, "A tale of three schools:
Insights on autocorrelations of short-horizon returns," Review of Financial Studies, vol. 7, pp. 537-573, 1994.
[4] S. G. Badrinath, J. R. Kale, and T. H. Noe, "Of shepherds, sheep and the
cross-autocorrelations in equity returns," Review of Financial Studies, vol.
8, pp. 401-430, 1995.
[5] G. McQueen, M. Pinegar, and S. Thorley, "Delayed reaction to good
news and the cross-autocorrelation of portfolio returns," Journal of
Finance, vol. 51, pp. 889-919, 1996.
[6] J. Campbell, A. Lo, and A. MacKinlay, The Econometrics of Financial
Markets, New Jersey: Princeton University Press, 1997.
[7] T. Mech, "Portfolio autocorrelation," Journal of Financial Economics,
vol. 34, pp. 307-344. 1993.
[8] K. Chan, "Imperfect information and cross-autocorrelation among stock
prices," Journal of Finance, vol. 48, pp. 657-684, 1993.
[9] M. Grinblatt, S. Titman, and R. Wermers, "Momentum investment
strategies, portfolio performance, and herding: A study of mutual fund
behavior," American Economic Review, vol. 85, pp. 1088-1105, 1995.
[10] D. Keim and A. Madhavan, "Anatomy of the trading process: Empirical
evidence on the behavior of institutional traders," Journal of Financial Economics, 37, 371-398,
[11] S. A. Ross, "Information and volatility: The no-arbitrage martingale
approach to timing and resolution irrelevancy," Journal of Finance, vol.
44, pp. 1-17, 1989.
[12] J. Conrad, M. N. Gultekin, and G. Kaul, "Asymmetric predictability of
conditional variances," Review of Financial Studies, vol. 4, pp. 597-622,1991.
[13] I. Hasan, and B. B. Francis, "Macroeconomic factors and the asymmetric
predictability of conditional variances," European Financial
Management, vol. 4, pp. 207-230, 1998.
[14] R. D. F. Harris, and A. Pisedtasalasai, "Return and volatility spillover
between large and small stocks in the UK," Journal of Business Finance
& Accounting, vol. 33, pp. 1556-1571, 2006.
[15] A. Alsubaie, and M. Najand, "Trading volume, time-varying conditional
volatility, and asymmetric volatility spillover in the Saudi stock market,"
Journal of Multinational Financial Management, vol. 19, pp. 139-159,2009.
[16] A. Pardo, and H. Torr├│, "Trading with asymmetric volatility spillovers,"
Journal of Business Finance & Accounting, vol. 34, pp. 1548-1568, 2007.
[17] Karmakar, M., "Information transmission between small and large Stock in the national stock exchange in India: An empirical study," Quarterly
Review of Economics and Finance, vol. 50, pp. 110-120, 2010.
[18] S. Johansen, "Estimation and hypothesis testing of cointegration vectors
in Gaussian vector autoregressive models," Econometrica, vol. 59, pp.
1551-1580, 1991.
[19] C. W. J. Granger, "Investigating causal relations by econometric models
and cross-spectral methods," Econometrica, vol. 37, pp. 424-438, 1969.
[20] R. F. Engle, and K. F. Kroner, "Multivariate simultaneous generalized
ARCH," Econometric Theory, vol. 11, pp. 122-150, 1995.
[21] R. F. Engle, and V. K. Ng, "Measuring and testing the impact of news on
volatility," Journal of Finance, vol. 48, pp. 1749-1778, 1993.
[22] L. R. Glosten, R. Jagannathan, and D. E. Runkle, "On the relation
between the expected value and the volatility of the nominal excess return
on stocks," Journal of Finance, vol. 48, pp. 1779-1801, 1993.
@article{"International Journal of Business, Human and Social Sciences:56471", author = "Sang Hoon Kang and Seong-Min Yoon", title = "Information Transmission between Large and Small Stocks in the Korean Stock Market", abstract = "Little attention has been paid to information
transmission between the portfolios of large stocks and small stocks in the Korean stock market. This study investigates the return and volatility transmission mechanisms between large and small stocks in
the Korea Exchange (KRX). This study also explores whether bad news in the large stock market leads to a volatility of the small stock
market that is larger than the good news volatility of the large stock market. By employing the Granger causality test, we found
unidirectional return transmissions from the large stocks to medium
and small stocks. This evidence indicates that pat information about
the large stocks has a better ability to predict the returns of the medium and small stocks in the Korean stock market. Moreover, by using the
asymmetric GARCH-BEKK model, we observed the unidirectional relationship of asymmetric volatility transmission from large stocks to
the medium and small stocks. This finding suggests that volatility in
the medium and small stocks following a negative shock in the large
stocks is larger than that following a positive shock in the large stocks.", keywords = "Asymmetric GARCH-BEKK model, Asymmetric volatility transmission, Causality, Korean stock market, Spillover effect", volume = "5", number = "12", pages = "1900-7", }
