Macroeconomic Fundamentals and the Volatility of Foreign Investors' Net Purchase in Korean Stock Market

Abstract

We employ the GARCH-MIDAS model to examine whether low-frequency macroeconomic variables help to explain the high-frequency volatility of the foreign investors' net purchase in Korean stock market. The estimation results show that business cycle expansion along with high production growth, high inflation and low unemployment rate predicts high volatility in the near future. Higher interest rate and lower money growth are also likely to lead to higher volatility of foreign investors' net purchase. We also find that domestic macroeconomic variables, relative to the US variables, have a stronger correlation with the future volatility of foreign investors' net purchase.