bluuebunny/crossref_metadata_2025 huggingface dataset:
Theoretical Identifications of the Market Price of Risk under the Affine Interest Rate Model with Jumps
Authors: Rhee Joon Hee
Published: September 2020

Any finance models must specify the market prices of risk that determines the relationship between the two probability measures. Although the general form of the change of measure is well known, few papers have investigated the change of measure for interest rate models and their implications for the way a model can fit to empirical facts about the behaviour of interest rates. This paper demonstrates that arbitrary specifications of market price of risk in empirical studies under the two factor affine interest rate model with jumps are not compatible with the theory of original interest rate model. Particularly, the empirical models of Duffee (2002) and Duarte (2003) may be wrong specifications in some parts under a rigorous theoretical interest rate theory.
Empirical Study on the Maturity Structures of the Volatility in the KOSPI200 Index and Futures Returns
Authors: Yoon Jong In
Published: September 2020

This study analyzes the maturity structure of the volatility in the KOSPI200 index and futures returns. Using bivariate GARCH model, we obtain the empirical evidences that the maturity structure of the volatility is U-shaped unlike the well-known Samuelson effect. Remarkably. U-shaped structures are found not only in the futures market but also in the spot market These evidences imply that returns are more volatile around tile futures maturity date in both markets.

Some explanations are suggested about U-shaped maturity structures. First, under Samuelson hypothesis it is possible to show that the volatilities are high around the maturity date because of the volatility clustering and the volatility spill-over. Second, we try the regression of the volatility on variables such as the proportion of the individual investors, the foreign investors, and the program trading. These variables are U-shaped or inverse U-shaped due to the remaining maturity. Only before 2000, it is found that the proportions of the foreign investors and the program trading are compatible with U-shaped volatility structures.
An Empirical Research on the Informational Efficiency of Model Free Implied Volatility
Authors: Rhee Byung Kun , Hwang Sang Won
Published: September 2020

Black-Scholes Imolied volatility (8SIV) has a few drawbacks. One is that the model Is not much successful in fitting the option prices. and It Is n야 guaranteed the model is correct one. Second. the usual tradition in using the BSIV is that only at-the-money Options are used. It is well-known that IV's of In-the-money or Qut-of-the-money ootions are much different from those estimated from near-the-money options.

In this regard, a new model is confronted with Korean market data. Brittenxmes and Neuberger (2000) derive a formula for volatility which is a function of option prices‘ Since the formula is derived without using any option pricing model. volatility estimated from the formula is called model-tree implied volatillty (MFIV). MFIV overcomes the two drawbacks of BSIV. Jiang and Tian (2005) show that. with the S&P index Options (SPX), MFIV is suoerlor to historical volatility (HV) or BSIV in forecasting the future volatllity.

In KOSPI 200 index options, when the forecasting performances are compared, MFIV is better than any other estimated volatilities. The hypothesis that MFIV contains all informations for realized volatility and the other volatilities are redundant is oot rejected in any cases.
Measuring Informational Advantage of A Group of Investors
Authors: Oh Seung Hyun
Published: September 2020

This study interprets various theories of volume of stock markets in a unified DOint of view and classifies the theories into 4 categories: risk premium theory, adverse selection theory, privately informed trading theory, and market stabilization theory. Risk premium theory and adverse selection theory predict that net buying amount of an uninformed trader and future stock return have negative correlation and that ttle correlation approaches-I as current return volatility increases. Privately informed trading theory and market stabilization theory predict that net buying amount of an Informed trader and future stock return have posltive correlation and that the correlation approaches 1 as current return volatility increases.

Utilizing these two predictions. this study suggests a method of measuring informational advantage of a group of investors. To measure degrees of Informational advantage of some investor groups in Korean stock market. the method is applied to 7 groups of investors: foreign investors, individual investors. institutional investors, securities companies, Insurers. ITCs, and banks. The result shows that ITCs have the highest degree of informational advant~ age while Individual investors have the lowest level of informational advantage. The fact that this result is consistent with prior researches means that the method suggested in this study has enough empirical validity. This method may be used in a performance evaluation process for a specific fund or a portfolio manager.
A Simulation Analysis on the Tradeoff Between Cost and Risk in Replicating ELS (Equity-Linked Securities) with Transactions Costs: The Early Redeemable Case
Authors: Park Jun Young , Hyun Chongseok
Published: September 2020

The trade-off between cost and risk of discretely rebalanced ELS hedges is analyzed under the proportional transaction costs. The analysis shows that the transaction costs have a considerable impact on the hedging performance.

The trade-off, or mean-variance graphs move in the right and lower directions in cases that the drift or the volatility of the underlying asset increases, the redemption level of the ELS decreases, or the maturity of the ELS gets longer.

The underlying asset move-based strategy (UAMB) reveals better performances than the time-based strategy (TS), while the delta move-based strategy (DMB) shows worse results. However, as the volatility of the underlying asset grows, the time-based strategy shows worse performances than the other two strategies does.

The difficulty of computational burden in simulating the hedge procedure is alleviated using the vectorized scheme, which makes the simulation analysis in feasible time.
Default Correlations in the Presence of Coskewness and Cokurtosis Between Two Firm Values
Authors: Kim Hwa-Sung , Bae Kwangil
Published: September 2020

The previous studies on coskewness and cokurtosis between assets concentrate on the effects of coskewness and cokurtosis on the returns and prices of financial assets. This paper explores the default correlation in the presence of coskewness and cokurtosis between two firm values. In doing so, we extend the structural model of Merton (1974) to incorporate coskewness and cokurtosis. We can observe some findings as follows. First, there are no significant effects of skewness and kurtosis associated with each individual firm return on default correlation. Second, the lower coskewness (or the higher cokurtosis) is, the larger default correlations are. But we can observe the opposite result for the firms with low credit rating as the maturity gets longer.
How Valuable are the Commodity Assets to Investors?
Authors: Kang Jangkoo , Wang Jah Yeun , Lee Changjun
Published: September 2020

This study examines how commodity assets affect investors. Our main findings can be summarized as follows. First, the Sharpe ratio of commodity indexes is higher than that of stocks and bonds over the last ten years. Second, commodity (traditional) assets are positively (negatively) related with inflation, which implies that commodity assets provide better hedge against inflation. Third, a break-even analysis indicates that including commodity assets in diversified portfolio of stocks and bonds enhances the performance of the portfolio. Fourth, the numeraire portfolio approach of Hentschel et al.(2002) shows that, to some extent, there are gains by including commodity assets in a portfolio of stocks and bonds. For example, transaction cost of 0 to 92 basis points would keep a log-utility investor from including the Rogers International Commodities Index (RICI) in one’s portfolio. In sum, commodity assets enhance the performance of portfolio, and the performance gain is especially pronounced during the bear stock market.
Common Factors and Local Factors in Variance Risks: Evidence from S&P500 and KOSPI200 Index Options
Authors: Yoon Sun-Joong , Kang So Hyun
Published: September 2020

This paper conducts a factor analysis using the implied variances of S&P 500 index options and KOSPI 200 index options. After estimating the factors that influence variance risks, we rotate the factors to decompose them into a common factor and local factors. The results show that 10~12 percent of variance risks in both markets is explained by the common factor and 65 percent of S&P 500 implied variances and 70 percent of KOSPI 200 implied variances are explained by each local factor, which is in contrast to the results for bond markets that the most variation of interest rates could be explained by a common factor. To figure out the source of common and local factors, additionally, we adopt the regression models that incorporate the risk-neutral (RN) variance, skewness, and kurtosis as explanatory variables. Approximately, the common factor is mainly determined by the RN variance of the S&P 500 index and RN higher moments of the KOSPI 200 index. In contrast, the S&P 500 local factor is influenced by the RN variance of the S&P 500 index and the KOSPI 200 local factor is explained by the RN higher moment of the KOSPI 200 index.
An Empirical Study on the Asymmetric Effects of Trading Volume Information in int‘l Currency Futures Markets: Advanced vs Emerging Markets
Authors: Hong Chung-Hyo
Published: September 2020

This paper tested the conditional mean spillover effects between trading volume and price changes in international currency futures markets. We use 8 kinds of currency futures markets such as Japanese yen, British pound, Australian and Canadian dollar as the advanced market and Korean Won/Dollar, Brazilian Real, Russian rubul and South African's land futures as the emerging markets. The sample period is covered from May 19, 2006 to March 15, 2009. For this purpose we employed dynamic time series model such as Nelson (1991)'s Exponential GARCH (1, 1)-M. The major empirical results are as follows; First, according to the empirical results of 4 advanced currency futures markets, we find that the open interests have a strong impact on the price changes at a statistically significant level. In case of the British pound and Canadian dollar futures, the price changes also have influence on the open interests. Second, according to the empirical results of 4 emerging currency futures markets, only Russian currency futures' open interest has an impact on the price change but the price changes of the remain 3 countries have an impact on open interests respectively at a significant level. Third, we also find that there is a asymmetric volatility spillover effects between open interests and price changes in all the advanced and emerging currency futures markets. Fourth, according to Granger causality test the influence of Japanese yen, Australian and Canadian dollar and Brazilian Real futures on the other currency futures markets are dominant. From these empirical results we infer that most of currency futures markets have a much better price discovery function than currency cash market and are inefficient to the information.
Value-at-Risk Forecasting using Realized Volatility Models and GARCH-type Models
Authors: Jeon Chan-Soo
Published: September 2020

The aim of this paper is to compare the performance of VaR (value-at-risk) using Realized Volatility Models (which use intraday returns) with VaR the performance of GARCH-type Models (which use daily returns) with three different distribution innovations (normal distribution, t-distribution, skewed t-distribution). In this paper, we empirically examine VaR forecast of korean stock market using KOSPI and KOSDAQ. Empirical results indicate that the Realized Volatility models is superior to the GARCH-type models in forecasting VaR. We also find Var forecast by skewed t-distribution model are more accurate than those using the normal and t-distribution models. Thus, VaR using Realized Volatility models and skewed t-distribution enhances the performance of risk management in Korean financial markets.
Foreign Currency Derivatives and Foreign Exchange Rate Exposure Management of KOSDAQ Firms
Authors: Kwon Taek Ho
Published: September 2020

This study examines the foreign currency derivatives trading of KOSDAQ firms and analyses the relations of derivatives trading and foreign exchange rate exposure in the period 2005~2010. The amount of derivatives trading reaches 27.7% of total assets for the trading firms before global financial crisis period (2005~2007). While, the amount decreases to 17.6% of total assets during the crisis period (2008~2010). These amounts are much greater than those of KOSPI firms which are calculated using similar data specification and periods. The variables which are usually adopted as determinants of derivatives trading do not explain the usage of derivatives in the analysis of period 2005~2007. These results suggest that KOSDAQ firms use derivatives not only foreign exchange risk managements but also trading purposes during this period. Test results do not show sufficient evidence that KOSDAQ firms use derivatives trading in an effective manner to manage foreign exchange rate exposure. In sum, test results suggest that to achieve the goal of managing foreign exchange rate exposure firms should estimate their open position in foreign currency properly before conducting foreign currency derivatives trading.
Price Discovery and Spillover Effect between Currency Futures Market and Spot Market-Comparing Developing Country with Developed Country
Authors: Xue Xing Qun , Park Sae Woon , Kim Hee Ho
Published: September 2020

This study examines the volatility spillover effect and forward pricing effect between futures and spot markets, using the daily data of January 1988~April 2013 and Bounds test, ARDL model, DCC-GARCH model and the new method of spillover index calculation. In particular, the comparison between the developed and emerging markets will shed a light on a difference between the efficiencies of the two groups of markets. Our results show that the volatility spillover effect in the developed market was less in magnitude, compared to that effect in the emerging market. The causal influence from the future market to the spot market was greater in the developed market than in the emerging markets. This indicates that the foreign exchange markets (future and spot both) were much more efficient in the developed markets than in the emerging markets. This also implies very fruitful guides for the foreign exchange intervention policy, including signaling effect, portfolio effects, and direct and indirect intervention effects.
Loss Aversion and Market Liquidity in the Real Estate Market
Authors: Park Sun Young
Published: September 2020

The most commonly observed risk averse behavior in the commercial real estate market is loss aversion on the part of investors; i.e., investors are more sensitive to prospective losses than to prospective gains. This observation leads to the natural question : Does the market rationally anticipate investors' loss aversion? If not, then does loss aversion become stronger in a relatively illiquid market? The answer to these questions provides strategically important implications to institutional investors. We propose to explore the impact of loss aversion on the commercial real estate market by testing two competing hypotheses : (1) the rational market expectation hypothesis and (2) the liquidity spiral hypothesis. The rational market expectation hypothesis holds that the market rationally anticipates investors' behavioral loss aversion. As a result, the interaction between lagged market liquidity and loss aversion does not have an impact on the probability of property sales. On the other hand, the liquidity spiral hypothesis holds that the interaction between market liquidity and loss aversion has an impact on the probability of property sales due to the self-fulfilling feedback effect between loss aversion and market liquidity. In the context of REITs' property transactions, we find partial evidence for the liquidity spiral hypothesis : private market liquidity and stock market liquidity each has an additional impact on the sale probability of property.
Knock-In and Stocks Market Effect Due to ELS Issuance and Hedging
Authors: Lim Hyuncheul , Choi Youngsoo
Published: September 2020

In this paper we analyze the shortfall risk implied in the auto call step down equity linked securities (ELS) based on two underlying assets, which is a major product of the rapidly growing ELS market as the low interest rate environment continues. And we also present the hedging strategies for managing shortfall risk. In the position of auto call step down ELS issuer, 1) until the underlying asset price reaches at knock-in (KI) level, the delta of the underlying is continually and significantly increased in order to hedge the short position of the Down and Out (DO) option and the long position of the put option inherent in ELS, 2) however, the hedger must reduce this delta as soon as the underperformed underlying price touches KI level, which triggers the vanishing of the DO option.

As a way to manage these shortfall risks, this paper proposes two new hedging strategies of minimizing these shortfall risks and depending on the KI probability. Also this paper shows that these hedging strategies provide better performance than traditional BS hedging strategy when these hedging strategies are applied to a sample product with real market data.

As the policy proposals, first, in order to prevent the concentration of the KI prices, ELS issue amount based on the same underlying is needed to be determined in consideration of both the average market trading volume and maximum leverage delta. Second, in the realm of pin risk such as Knock-In or Knock-Out, where the leverage increases, it is recommended to mitigate the risk management delta limit based on the BS model which is made under the assumption of continuous hedging infinitesimally.
On the Usefulness of Risk-Neutral Skewness and Kurtosis for Forecasting the Higher Moments of Stock Returns
Authors: Kim Sol
Published: September 2020

In this paper, we examine whether the risk neutral skewness and kurtosis from S&P 500 options have information for predicting the higher moments of the stock returns called skewness and kurtosis, which contain the important information for forecasting potential crash, spike upward and the fluctuations of stock index. We find that the implied risk neutral skewness and kurtosis does not provide the information contents for predicting the higher moments of S&P 500 index return, after eliminating the overlapping data. All the results are robust to the alternative measures of risk neutral moments from options prices, the sub-periods and forecasting periods.
Effect of Margin Requirement on Default Risk and Liquidity in the Korean Futures Market
Authors: Kim Hak-Kyum , Park Jinwoo
Published: September 2020

Margin requirements are often viewed as an effective policy tool to prevent the default risk and maintain market stability. For the Korean futures market, this paper examines whether the margin requirements work normally as a tool to prevent default risk and margin changes have impact on futures trading activity. KOSPI200 stock index futures, USD (U.S. Dollar) futures, and 3-year KTB (Korean Treasury Bond) futures are included in the sample for the period from 2010 to 2015. Using the simulation method assuming the worst situation, we find that the possibility of default occurs once for KOSPI200 futures, twice for 3-year KTB futures, and 7 times for USD futures during the sample period. This result suggests that active margin requirement policy is necessary to prepare for financial market turbulence. In addition, we find that the margin changes do not have a significant impact on the futures trading activity, suggesting that decreases in margins are not effective means to improve liquidity in the Korean futures market
Short-Selling and Behavioral Bias in Korean Stock Market
Authors: Hahn Sang Buhm
Published: September 2020

This study investigates whether or not the short-selling behavioral bias of investors exists in the Korean stock market. We analyze how the weather bias related to climate factors affects short-selling traders, commonly known as informed traders. To do this we estimated the dynamic panel model using daily data and examined the relationship between market variables such as stock returns, short sale volume, non-short sale volume, total trading volume, and weather variables consisting of cloud cover and sunshine hours. This study shows that not only returns but also short selling volumes are all affected by weather factors. In the case of stock returns, both cloud cover and sunshine hours have a statistically significant impact on returns, and its sign is estimated to be inversely proportional to both factors. That is, we find that returns decrease on cloud days, but increase on sunny days. In terms of the trading behavior of the market participants, it is interesting to note that the trading volume decreases when the weather is blunted, But did not show any statistical significances. On the other hand, both the original and the seasonally adjusted weather factors of cloud cover have a statistically significant positive effect on the short-sale volume. This means that as the weather worsens, short-selling traders submit more orders, indicating the presence of behavioral bias.
Do the Option Prices Forecast Spot Price? Evidence from the KOSPI 200 Index Option Market
Authors: Choi Byungwook
Published: September 2020

This study investigates a forecasting power of volatility curvatures and risk neutral densities implicit in KOSPI 200 option prices by analyzing minute by minute historical index option intraday trading data from January of 2007 to January of 2011. We begin by estimating implied volatility functions and risk neutral price densities based on non-parametric method every minute and by calculating volatility curvature and skewness premium. We then compare the daily rate of return of the signal following trading strategy that we buy (sell) a stock index when the volatility curvature or skewness premium increases (decreases) with that of an intraday buy-and-hold strategy that we buy a stock index on 9:05AM and sell it on 2:50PM. We found that the rate of return of the signal following trading strategy was significantly higher than that of the intraday buy-and-hold strategy, which implies that the option prices have a strong forecasting power on the direction of stock market. Another finding is that the information contents of option prices disappear after three or four minutes.
The Effect of Derivatives Usage of Korean Commercial Banks on Their Firm Value
Authors: Kwon Taek Ho , Park Rae Soo , Chang Uk
Published: September 2020

In this study, we would be interested in knowing how commercial banks use derivatives and analyze its effect on the firm vale in Korea. We find that the derivatives transaction by banks increases during the analysis period and that banks use the derivatives mostly for speculation rather than hedging. Foreign exchange risk is mostly concerned for the purpose of risk hedging, and forward and/or futures are preferred to other derivatives such as option or swap. We also find that the usage of derivatives has a positive effect on the firm value of Korean commercial banks.
Analysis of ELW Investor‘s Trading Pattern and P/L Reationship
Authors: Choi Youngsoo , Kwon Eunji
Published: September 2020

Conventional study on the trading pattern of investors is either done in the viewpoint of the identity of investors or analyzed on the base of investor's type, which is categorized according to the number of transactions using only restricted security company data. Dataset in this paper is extended to all ELW series and investor's type such as the LP (Liquidity Provider). High-frequency traders are categorized on the base of average number of transactions per day and average trading volume per day. We analyze their trading pattern and relationship between P/L (profit and loss) and their trading pattern. Also We develop a new measurement tool, called the holding period, to comprehend the characteristic of high frequency trading and analyze the effect of holding period on P/L of investors.

Our empirical investigation shows that, for general investors, 1) their counterparties are LP during the execution of buy low and sell high trading strategy, 2) they lose in the cumulative P/L for the intermediate transaction although their average sell price is more expensive than average buy price, 3) due to the lack of risk management technique such as stop loss, they lose in the cumulative intermediate transaction P/L although their winning ratio is higher than losing ratio. On the other hand, 1) scalpers are mainly engaged in trading index ELW market, 2) due to the appropriate execution of stop loss, they win in the cumulative P/L for the intermediate transaction although their draw ratio and trading unit price are high. Meanwhile, due to the LP's passive characteristic for the buying execution after selling, their draw ratio is very low and their buy unit price is higher than sell unit price in comparison to other investor type, and their trading pattern is negatively related to that of the other investor type. Finally we confirm that the holding period is a significant impact on P/L of general investors and scalper.

As a policy proposal, it is necessary to introduce a market maker system in the individual stock options market for activating the stock options market, which has a more competitive market structure than ELW market. In the viewpoint of financial consumer protection, education on the time value reduction of contingent claim derivatives with finite maturity is necessary.
A Study on the ELW Market by Investor Types: Focused on DMA System
Authors: Choi Youngmin
Published: September 2020

This paper focuses on the controversy about DMA (direct market access) system that facilitates ELW (equity linked warrants) transaction. We analyze trading profit/loss and such features in accordance with the investor type by the combination of trading counts and trading amounts. Especially, our analysis centers on whether brokerages’ providing DMA system contributes to the market expansion and DMA system serves as a profit-making expedient for the investors whose trading amount is large or trading frequency is high.

Based on our empirical examination utilizing total ELW trading data from 2009 to 2011, the following implications are obtained as a result: Firstly, the growth of the ELW market mainly comes from the increased transactions by the investors accessing via DMA and there is no evidence that providing DMA system itself adds to the revitalization of overall market. Secondly, our GMM results using dummy variables confirm us that providing DMA possibly plays a critical role in making profit for the investor of large trading amount or high trading frequency. Our results support the structural problem is embedded in ELW market and DMA system intensifies such unfair game.
Does CDS Premium Most Predict Sovereign Default Risk?
Authors: Binh Ki Beom , Woo Seokjin , Lee Sang Min
Published: September 2020

This paper empirically analyzes the price discovery process between Korean sovereign CDS premium, spread of Korean government debt, Won-Dollar currency swap rate, and Won-Dollar FX rate. With the global financial and fiscal crisis, especially in the U.S. and Euro-zone, the interests in sovereign default risk have risen. Interests in CDS, an OTC credit derivative contract based on debt issuer’s default risk, also have increased.

A large number of presses have reported that CDS premium would be the best international market indicator for the default risk taken or transferred. However, internationally the CDS market liquidity has not been sufficient enough to validate its properties. Hence, based on empirics, this paper discusses whether Korean sovereign CDS premium can be considered as an appropriate indicator of sovereign credit risk in the Korean economy. Other largely accepted indices which contain the similar information about Korean economic fundamental and Korean external sovereign credit risk are also analyzed and compared: the spread of Korean government debt, Won-Dollar Currency Swap Rate, and Won-Dollar FX rate.

Our findings include: (a) in the price discovery process, Won-Dollar spot rate contributes to the price discovery especially most ‘during the financial crisis period’ and the ‘entire period’ (b) Within the period ‘after the financial crisis’, CDS premium and the other indices have mutual influences on the price discovery process higher than the period ‘before the financial crisis’ (c) while Won-Dollar forward rate shows the similar result with Won-Dollar spot rate, NDF rate and CDS premium make the largest mutual influence on price discovery in the period ‘before the financial crisis.’
Private Equity Fund Performance and Persistency by Fund Type
Authors: Song IK , Kang Ji Eun , Yun Chang Hyun
Published: September 2020

This study investigates the private equity funds’ performances and persistence by fund type. Diversification benefit exists between public equity and private equity and among different types of private equity funds. The net IRR of private equity funds depends on fund type, economic growth, stock market performance, inflation and interest rate. Fund performance was negatively correlated with capital inflow to private equity market and fund size. Fund size and series are positively correlated. Performance persistency exists in private equity fund managers. Fund type is very important factor in analyzing private equity fund performance and persistency.
The Martingale Restriction and Relative Market Efficiency between KOSPI 200 Index and Index Options Market
Authors: Kang Tae-Hun , Lee Myung-Chul
Published: September 2020

This paper examines the martingale restriction for the KOSPI 200 index options market. And in cases of the rejections, we investigate the relative market efficiency between stock index and stock index options market, using approximate entropy (ApEn) method proposed by Pincus (1994), which quantifies a complexity, irregularity and unpredictability in time series. The empirical results of this study clearly reject the martingale restriction and regression analyses indicate that the historical returns of underlying index can explain about 25% of the price differences between option-implied and market index prices but the total trading volume can explain only a small portion of the price differences. These results have cast doubt on the informational efficiency of this market. Comparing the relative market efficiency based on ApEn have showed that the complexity or irregularity of KOSPI 200 index is larger than the index options during the entire sample period. But, Examining separately ApEn of the magnitude and the sign time series which compose log-returns document that stock index options market reflect more efficiently the information about the direction of price changes than the stock index market in 2014 and the efficiency of the index options market about the directional information may be affected by directional traders who prefer certain strategies designed by exploiting past stock market movements.
A Comparison of Price Efficiency between Korean New Market and Main Board
Authors: Seon Junghoon , Lee Ji Soo
Published: September 2020

In this paper, we make a comparison of price efficiency between the new market (KOSDAQ) and the main board (KOSPI) in the Korean stock market. More specifically, we evaluate the relative price efficiency of both markets by comparing the speed, degree and accuracy in process of intraday price discovery. Each market’s speed and degree of price discovery are measured by WPC (weighted price contribution) devised by Barclay and Warner (1993) and WPCT (weighted price contribution per trade) proposed by Barclay and Hendershott (2003), respectively. Each market’s accuracy of price discovery is measured by unbiased regression coefficient used by Biais et al. (1999). We analyze 535 KOSPI stocks and 803 KOSDAQ stocks using 1-minute-interval transaction data collected from Bloomberg. The major findings of this paper are summarized as follows: Fist, the price discovery in KOSDAQ, the new market is slower than in KOSPI, the main board. Second, the morning session’s degree of price discovery per trade in KOSDAQ is smaller than KOSPI. Finally, the price discovery in KOSDAQ is more accurate than in KOSPI. Overall, our results indicate that the prices of KOSDAQ stocks are as efficient as the prices of KOSPI stocks, thought they have smaller firm size, younger ages, and greater uncertainty in cash flow and asset value than the main board stocks do.
Closing Call Auction Prices as Settlement Prices for Derivatives Contracts and Price Manipulation
Authors: Yoon Sun-Joong
Published: September 2020

Previous literature emphasizes the importance of a closing call auction system because it can not only improve the price discovery effect, but also mitigate the possibility of price manipulation. However, Korea Exchange, which has adopted a closing call auction system, has still suffered from the price manipulation, most cases of which are likely to be related to the derivatives contracts. Based on this environment, this paper investigates why KRX experiences the closing price manipulations so much, even though it adopted the closing call auction system. Generally, a price manipulation occurs when the legal/administrative penalty is less than the expected economic gain or when a specific market structure increases an incentive to manipulate the price. In this paper, we find that the adoption of a closing call auction price as a settlement price for KOSPI derivatives contracts strengthens the incentive for closing price manipulation, which is supported by Kyle (2007). Kyle (2007) shows that if a closing price is used as a settlement price and investors can execute the ‘market-on-expiration orders’ surely, the derivatives with cash settlement are susceptible to the price manipulation such as squeezing or cornering, equally as the derivatives with physical settlement. As such, KRX is the only financial market that satisfies the above conditions. This paper tries to verify this argument by introducing the Hong Kong Exchange case, the Korean ELS-related manipulation case and the Deutsche Bank case. Therefore, we strongly recommend changing the settlement price of KRX derivatives contracts into an average price, which is similar with the well-developed financial markets.
An Empirical Study on Implied Volatility Skew Using PCA
Authors: Kim Jin Woo , Rhee Joon H.
Published: September 2020

This paper extracts the factors determining the implied volatility skew movements of KOSPI200 index options by applying PCA (Principal Component Analysis). In particular, we analyze the movement of skew depending on the changes of the underlying asset price. As a result, it turned out that two factors can explain 94.6%~99.8% of the whole movement of implied volatility. The factor1 could be interpreted as ‘parallel shift’, and factor2 as the movement of ‘tilt or slope’. We also find some significant structural changes in the movement of skew after the Financial Crisis. The explanatory power of factor1 becomes more important on the movement of skew in both call and put options after the financial crisis. On the other hand, the influences of the factor2 is less. In general, after financial crisis, the volatility skew has the strong tendency to move in parallel. This implies that the changes in the option price or implied volatility due to the some shocks becomes more independent of the strike prices.
The Effect of NPS‘s FX Trading on Exchange Rate
Authors: Im Eun-a , Kang Hyoung-goo , Jun Sang-gyung
Published: September 2020

In June 2014, the asset under management of National Pension Service (NPS) of Korea reached over 444 trillion won. NPS forecasts that the asset size will gradually grow to around 2,561 trillion won until 2043. The NPS investment of domestic equities and fixed income securities have been already saturated. So the NPS started to expand in global investment. Accordingly, the worries have grown that NPS's trading in foreign exchange markets may lead to the instability in FX markets. This study has analyzed the influence of NPS's foreign exchange transactions in domestic FX market. The period of study was 54 months from Jan 2010 to June 2014. For detailed research, separate analysis was performed by full year and each year. Our main findings can be summarized as follows : There are statistically plus significant influences of the NPS’s trading volume on the estimated volatility of spot rate on the first half. However, there are minus significant influences on the second half. The NPS's FX trading is known to be systematically regulated by the financial planning of the investment committee. The result of this study shows that the regulation of the NPS’s FX trading minimizes the disturbances of the currency by maintaining the stable market expectation in FX markets.
Controlling Shareholder‘s Self-dealings and Government Monitoring Game
Authors: Kwon Sehoon , Kim Wi Saeng
Published: September 2020

Following Zingales (1994) and Gilson (2006), this paper assumes that controlling shareholders have incentives to secretly transfer parts of corporate earnings to themselves, and the government to reduce these corporate self-dealing activities. We study if there exist certain levels of government monitoring intensities which are optimal for all parties involved; controlling shareholders, public investors and the government. Our model shows that there exists Nash equilibrium in corporate self-dealing and governmental monitoring levels. At this equilibrium, the optimal corporate investment level is greater than the counterpart in the absence of self-dealings and government monitoring. Our model further shows that the main determinants for the equilibrium level are monitoring efficiency, severity of self-dealings penalty, and marginal return on investment. Interestingly, however, we can not conclude that either controlling shareholders’ equity ownership ratios or corporate tax rates determines the optimal investment level.
An Empirical Study on the Factors Influencing on the Hedge Effectiveness of Korea Treasury Bond Futures
Authors: Choi Wan Seuk , Rhee Joon H.
Published: September 2020

This paper performs the empirical analysis on the factors affection the hedge effectiveness of Korea Treasury Bond (KTB) Futures by different hedge models. Before analyzing the factors, firstly, we compare the hedge effectiveness for benchmark bond portfolio among different hedge models. We find that KTB Futures' hedge effectiveness do not produce significant difference depending on the different models.

Secondly, we test hedge effectiveness for the corporate bond. The results vary depending on the credit ranks. Below BBB rating, hedge effectiveness deteriorated significantly. This seems to be caused by the fact that BBB rated bond is more prone to be affected by credit risk rather than interest rate risk.

Thirdly, hedge effectiveness analysis for the maturity term mismatch, KTB Futures has performed poorly as underlying bond maturity mismatching with Futures. Finally, different yield curve shape, Futures price undervaluation or time to maturity of Futures do not produce significant effect for the hedge effectiveness.

In summary hedge effectiveness of KTB Futures (3 Year, 10 Year) seems to be dominantly affected by the 1) underlying hedging bond credit rating and 2) hedge term mismatch. Other factors such as yield curve shape, undervaluation of Futures and time to maturity of Futures has limited contribution under our research.
The Expiration Day Effects of Single Stock Futures : Evidence from Korea
Authors: Yoo Shiyong
Published: September 2020

In this study, we analyzed whether the expiration day effect of domestic single stock futures exists. One-minute stock prices and trading volume by trader types is used. Data ranges from May 2008 to June 2016. The expiration day effects are measured by price reversal, price shock, volatility effect, and volume effect. Since the expiration day of single stock futures is on the second Thursday of each month, we analyzed whether the expiration day effects differ between expiration Thursday and non-expiration Thursday. The price reversal effect is evident in Samsung Electronics and Hyundai Steel, and the price shock effect is evident for KT and KT&G. However, price reversals and price shocks are not generally found in other stocks. On the other hand, in most stocks (16 out of 22), the volatility effect variables were statistically significantly larger on the expiration Thursday than non-expiration Thursday. The expiration day effects of single stocks are evident in the trading volume. First of all, trading volume increased significantly on expiration Thursday than non-expiration Thursday. In particular, the trading-volume shares of institutional investors and foreign investors increase and the share of individual investors is decreasing. This suggests that the increase in trading volume on expiration Thursday is mainly due to the increase in the trading-volume shares of institutional investors and foreign investors, who are supposed to be in the information superiority. In addition, we can conjecture that the larger volatility level on expiration Thursday than on non-expiration Thursday may be due to institutional investors and foreign investors rather than individual investors.
Fee Structures of Outsourced CIO and the Operational Efficiency
Authors: Yoon Sun-Joong , Lee Sangki
Published: September 2020

This study examines the problems associated with the management fee on outsourced CIOs in the public pension funds in Korea and proposes a better management fee structure. The main results of this study are summarized as follows. First, the outsourced CIO is likely to make a profit, provided that the management cost of the outsourced CIO is lower than a fixed ratio in a fee structure. Second, the profit margin of public funds increases as the fixed ratio decreases. Third, the outsourced CIOs can make a sure profit under the existence of the fixed fee only, regardless of the performance of public funds. In addition, the profit of outsourced CIOs increases as the level of delegation fees for sub-management firms decreases. However, such a fee structure may result in making worse the overall performance of funds ultimately. Fourth, it is necessary to introduce the performance-linked fee structure when the outsourced CIOs of public pension funds are selected. Such a fee structure can mitigate the possibility that the outsourced CIOs reassigns fund to sub-management firms with low management capacities, thereby lowering the fund’s overall performance.
On Relation Between Margin and Conditional Volatility in Japanese Stock Market
Authors: Sohn Pan-Do , Kim Sung-Shin , Shin Jung-Soon
Published: September 2020

This paper investigates the asymmetric volatility between conditional volatility and initial margin using daily market return of TOPIX and Nikkei225 over 1970 to 1990. In prior studies, generally, it has been known that margin is regard as a main discipline to control volatility with respect to a policy tool. Our empirical test provides the following results. First, this paper shows that there is significantly positive relation between return of stock market and margin, implying that as margin increases, also return increases. Thus we conclude that the trade-off of risk and return is found. Second, our result suggests that in normal state, margin affects to conditional volatility negatively and significantly, indicating that margin policy could control the conditional volatility. Third, this paper finds that in recession state, there is little bit evidence of discipline action in controlling volatility. Fourth, our paper also finds that in boom state, there is adversely evidence of margin on conditional volatility. As a result, government has motivation to decrease the volatility in bull market state, whereas it also has motivation to increase the volatility in bear market state. Our paper finds the evidence that the motive for changing the margin is fitted to normal and boom state. Therefore, our result suggests that government has to adjust the change of margin policy adequately to fit the market conditions.
Managing Weather-Risks in Korean City-Gas Industry using Weather Derivatives
Authors: Choi Changhui , Shin Dong-Hoon , Kim Changki
Published: September 2020

The main objectives of this paper are to measure weather-risks in Korean city-gas industry, whose revenue is strongly correlated with temperature changes, and show how managing weather-related risks using weather derivatives (priced using a utility indifference pricing technique) affects Korean city-gas industry's volatility of cash-flow through computational tests.

Since the fluctuation in temperature is the major risk factor for Korean city-gas providers (who are mostly nongovernmental companies), they can considered as strong potential participants in weather-derivatives' market. Therefore, it is worthwhile to investigate the impact of temperature changes on city-gas demands and the effectiveness of the application of weather-derivatives to city-gas providers' revenue. Our tests indicate that hedging weather-risks using weather derivatives can not only reduce the volatility of cash-flow but also increase cash income for Korean city-gas providers.
Profit Analysis of Short Term Weekly Momentum Strategy in the Korean Stock Market
Authors: Hwang Jun Ho
Published: September 2020

This paper shows the momentum strategies that selected stocks based on their returns from a past 1 week generate long lasting significant abnormal returns. I observe the negative momentum profit from 1 week momentum portfolio and it disappears when the holding period is longer than 22 week.

In addition, I empirically shows that the weekly momentum strategies are able to generate negative profits also after the financial crisis. it is opposite result with literature, reported positive momentum after the financial crisis, I realize this result due to the characteristic of short term weekly momentum and market adjust returns. The price limit is one of the big features of Korean stock market. I consider the set of sample period by change of price limit. I find the positive momentum profits only in the period of narrow price limit range. For the check on the relation between liquidity and profit of momentum strategy, I employ the illiquid measure of Amihud (2002). I find that the strong and long lasting negative momentum profit from illiquid stock portfolio. This result implied that liquidity enhances the profit of momentum.