The Asymmetric Impact of Foreigners’ Trading Activities on Volatility: Quantile Regression Analysis

By analyzing the intraday trading activity datasets of foreign investors of KOSPI200 index futures, our study investigates the effects of foreign buy and sell side imbalances on contemporaneous KOSPI200 index futures market volatility, and then focus on examining whether foreign buy and sell side imbalances have an asymmetric effect on contemporaneous volatility. We employ open-close and Garman Klass volatility measures to examine asymmetry phenomenon. With the intention of better understanding the relation between trading activity of foreigners and market volatility, this study employs the quantile regression model to observe a complete picture of asymmetry phenomenon under the conditions of relatively higher, median, and lower volatility, and then compare with the OLS estimates. From our empirical results, we find that trading activity of foreign investors reduce contemporaneous volatility using OLS and quantile regression. OLS overestimates (underestimates) the effects of foreign trading activity on contemporaneous market volatility at the lower (upper) quantiles. Foreign buy side imbalance has a statistically greater effect on Garman Klass volatility than sell side imbalance at the upper quantiles, namely that when the KOSPI200 futures market volatility is high.