Review of Quantitative Finance and Accounting, 11 (1998): 23–35
© 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
The Effect of Market Transparency: Volatility and
Liquidity in the Korean Stock Market
SANG BIN LEE
Department of Business Administration, Han Yang University
JEE SEOK CHUNG
Korea Securities Computer Corporation
Abstract. Faced with unprecedented competition, stock markets should have fairness and transparency. The
effects of market transparency for the stock market volatility and liquidity will be investigated using the case of
the Korean stock market. The evidence from this study indicates that increasing the market transparency makes
the price discovery process more efﬁcient than before from the viewpoint of stock market volatility, and
increases the stock market liquidity compared with before.
Key words: Open limit order book, transparency, volatility, liquidity, Korean stock market
As the world becomes increasingly globalized, its stock markets ﬁnd themselves serving
the same customer base. To meet ever-increasing competitive pressures, stock markets
should have fairness and transparency.
In response to the competitive challenges result-
ing from advances in information technology, the trading arrangements of the world’s
stock markets have undergone dramatic changes. The most prominent feature of the global
exchange restructuring has been the adoption of electronic trading systems. As Amihud
and Mendelson (1985, 1989), Peake, Mendelson, and Williams (1989), Cohen and
Schwartz (1989), and Schwartz (1991) persisted, faced with unprecedented competition,
stock exchanges have implemented more efﬁcient electronic trading systems by embrac-
ing new informational technology. Among the many alternatives, the commonly used
measure is open limit order book as market transparency for fairness and transparency.
Theoretically, however, it is not clear whether the introduction of open limit order book
will have the desired effects on stock markets. The commonly cited beneﬁt is that such a
measure increases the transparency and reduces the liquidity cost of order processing. And
traders have the beneﬁt of up-to-date information on recent trades and standing limit
orders. Opponents argue that it may discourage trading, as investors do not want to signal
their trading needs because, in open limit order book, they must also reveal information
on their own orders.
Given the above contrasting views, the effects of open limit order book on stock
markets are therefore an empirical issue to be tested. However, there are few empirical
studies about the effects of open limit order book on the stock markets. Therefore, the
@ats-ss9/data11/kluwer/journals/requ/v11n1art2 COMPOSED: 03/17/98 11:03 am. PG.POS. 1 SESSION: 22