Abstract
Purpose - The purpose of this study is to examine how the volatility interruption (VI) mechanisms affect idiosyncratic volatilities in Korean stock markets.
Design/methodology/approach - Collecting the South Korea Stock Market (KOSPI) data from June 15, 2015 to March 31, 2019, we collect each residual, epsilon i,t, from three different estimated models: capital asset pricing model (CAPM), FF3 and FF5. To estimate the conditional idiosyncratic volatility, the authors employ two conditional time-varying measurements: GARCH and TGARCH.
Findings - The results show that the conditional idiosyncratic volatility increases when stock prices reach the upper and lower static limits, indicating the implementation of adopting static VI mechanism neither stabilize market conditions nor reduce excess volatility along with the existence of price limits.
Originality/value - Although market regulators and policymakers improve market conditions with the advanced VI mechanism, the empirical results show the adverse effect of the mechanism. Not allowing investors to earn above average returns without accepting above average risks makes Korean stock markets inefficient along with advanced VI mechanisms.