Clarifications on the Asymmetric Volatility Effect and Foreign Investors' Destabilizing Influence : Agents' Information Perception

In this paper, the relation of asymmetric conditional volatility to market agents' information perception ability is built and positively tested. Liquidity dry-ups during extreme market conditions, that, due to investors' risk aversion, are more pronounced during negative than positive news result in asymmetric volatility. The well known volatility feedback effect assures that the short term effect of liquidity dry-ups troubles a financial market for an extended period. An explanation for the perceived liquidity dry-ups is found in market microstructure theory; adverse information cost. The propositions are then tested using a well documented phenomenon; quot;Home Biasquot;. The positive relation of relative foreign investors' exposure to the German DAX to volatility levels in general and the asymmetry specifically is documented with high statistical significance.The results are far reaching; on the one hand trading mechanism can be better understood. On the other hand, capital flow regulations are illuminated