The Impact of Global Trading of Stocks on Return Volatility: Evidence from the Korean Stock Market

This paper analyzes the behavior of return and volatility using the opening and closing prices of Korea Exchange (KRX) stocks and examines the impact of global trading of cross-listed Korean stocks on the volatility. For the analysis, this paper specifically examines ratios of variances of open-to-open relative to close-to-close returns as well as correlation of returns for adjacent trading and non-trading periods for the KRX stocks, and the impact of global trading on variance ratios and return correlations. Through the analysis, this paper finds evidence from the Korean market that supports the explanation offered by Amihud and Mendelson (1991) attributing greater volatility in opening prices to the preceding overnight non-trading period. This paper also documents that opening prices reflect temporary pricing deviation while such deviations are less likely to occur at closing, and thus these deviations are likely a main source of pricing errors causing the greater volatility at the opening of the market. Moreover, by examining the price behavior of cross-listed KRX stocks and comparing the results with those of non-cross-listed stocks, this paper provides additional evidence that the high volatility at the daily opening may be attributed to the overnight non-trading period that precedes it and that globalization of stock trading can reduce pricing errors and improve value discovery.