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Dependence structure of the Korean stock market in high frequency data

Author

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  • Kim, Min Jae
  • Kwak, Young Bin
  • Kim, Soo Yong

Abstract

This paper analyzes the evolution of the dependence structure for various time window intervals, known as Epps effect, using the Trade and Quote data of 663 actively traded stocks in Korean stock market. It is found that the random matrix theory analysis could not represent the dependence structure of the stock market in the microstructure regime. The Cook–Johnson copula is introduced as a parsimonious alternative method to handle this problem, and the existence of the Epps effect is confirmed for the 663 stocks using high frequency data. It was also found that large capitalization companies tend to have a stronger dependence structure, except for the largest capitalization group, since the phenomenon of price level resistance leads to the weak dependence structure in the largest capitalization group. In addition, grouping the industry as a sub-portfolio is an appropriate approach for hour interval traders, whereas this approach is not a strategy recommended for high frequency traders.

Suggested Citation

  • Kim, Min Jae & Kwak, Young Bin & Kim, Soo Yong, 2011. "Dependence structure of the Korean stock market in high frequency data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(5), pages 891-901.
    • Handle: RePEc:eee:phsmap:v:390:y:2011:i:5:p:891-901
    DOI: 10.1016/j.physa.2010.11.026
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    References listed on IDEAS

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    1. Gençay, Ramazan & Dacorogna, Michel & Muller, Ulrich A. & Pictet, Olivier & Olsen, Richard, 2001. "An Introduction to High-Frequency Finance," Elsevier Monographs, Elsevier, edition 1, number 9780122796715.
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    Cited by:

    1. Lim, Kyuseong & Kim, Min Jae & Kim, Sehyun & Kim, Soo Yong, 2014. "Statistical properties of the stock and credit market: RMT and network topology," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 407(C), pages 66-75.
    2. Bouteska, Ahmed & Sharif, Taimur & Abedin, Mohammad Zoynul, 2023. "COVID-19 and stock returns: Evidence from the Markov switching dependence approach," Research in International Business and Finance, Elsevier, vol. 64(C).
    3. Lim, Kyuseong & Kim, Sehyun & Kim, Soo Yong, 2017. "Information transfer across intra/inter-structure of CDS and stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 486(C), pages 118-126.
    4. Hao, Jing & He, Feng, 2018. "Univariate dependence among sectors in Chinese stock market and systemic risk implication," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 510(C), pages 355-364.
    5. Kim, Min Jae & Kim, Sehyun & Jo, Yong Hwan & Kim, Soo Yong, 2011. "Dependence structure of the commodity and stock markets, and relevant multi-spread strategy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(21), pages 3842-3854.

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