The global shift from defined benefit to defined contribution pension plans has emphasized the importance of individual retirement saving decisions. In response, India introduced the NPS All India model to address the retirement needs of its unorganized labour force, offering subscribers a choice between the Auto Choice (life-cycle approach) and the Active Choice (customized allocation). Recognizing the financial literacy gap among subscribers, this study employs a Genetic Algorithm (GA) to determine the optimal asset allocation weights for Active Choice. The results demonstrate that the GA-optimized portfolio outperforms the Auto Choice in terms of expected returns, accumulated retirement wealth, and monthly pension, while maintaining manageable risk levels. These findings have important implications for policymakers and fund managers in enhancing retirement outcomes for unorganized sector workers.

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This study introduces a new sentiment-based variable called Relief (REL) to examine the impact of investor psychology—particularly emotions such as relief and regret—on asset pricing and decision-making in financialmarkets. Rooted in behavioral finance, the REL variable aims to capture a specific dimension of psychological stability that investors experience when their chosen asset performs better than the worst-performing peer in the same industry group. The REL variable is constructed by comparing the return of an individual asset with the lowest return among its industry peers. This comparison reflects an investor’s emotional comfort—or relief—from having avoided the worst-case scenario, even if the absolute return is modest or negative. Essentially, the REL variable quantifies a positive psychological payoff derived from relative outperformance, even when that outperformance is not impressive in absolute terms. Empirical analysis reveals a consistent pattern: investors tend to accept lower expected returns for assets with high REL values, indicating a stronger sense of emotional relief. In contrast, when an asset has a low REL value—meaning it did not outperform even the worst peer—investors demand a higher risk premium. This behavior highlights how emotional states influence investment decisions beyond traditional risk-return trade-offs. Importantly, the effects of the REL variable remain statistically significant even after controlling for the regret variable and firm-specific characteristics such as size, volatility, and the book-to-market ratio. This suggests that REL captures a unique behavioral dimension not fully explained by existing psychological or financial models. Moreover, the impact of REL is especially pronounced in small-cap stocks and assets with high idiosyncratic volatility—markets that are inherently more uncertain and thus more susceptible to emotionally driven behavior. The study also explores how psychological price anchors—such as recent highs—can amplify emotional reactions associated with REL. Investors become more sensitive to relative performance comparisons when asset prices move away from the psychological price barrier. In such contexts, feelings of regret or relief are intensified, causing greater deviations from rational investment behavior. These findings demonstrate that emotional biases are not isolated anomalies but are systematically embedded in market dynamics. One of the study’s key theoretical contributions lies in its challenge to traditional financial models that assume stable preferences and rational utility maximization. Instead, the REL variable supports a dynamic model of investor utility, where emotional responses like regret and relief actively reshape decision-making preferences. Regret reflects the emotional cost of missing a better opportunity, while relief provides a positive emotional benefit from avoiding the worst outcome. These emotions function as psychological forces that alter how investors evaluate gains and losses. Incorporating REL into behavioral finance expands the framework by accounting not only for negative emotions such as regret but also for positive emotions like relief. This dual-emotion perspective helps explain why investors may favor certain assets—not necessarily due to their fundamentals—but because of how those assets make them feel in relative terms. Investors may feel reassured knowing that their asset did not perform the worst, even if the overall return was subpar. From a practical perspective, the findings offer valuable insights for investment strategy, portfolio management, and risk assessment. Investment professionals who consider sentiment-based variables such as REL may be better positioned to understand market dynamics shaped by investor psychology. By identifying assets that generate strong feelings of relief, investors can anticipate lower return expectations, while also recognizing the increased return demands associated with assets that trigger regret or emotional discomfort. Additionally, understanding the emotional reinforcement embedded in relative performance may lead to more psychologically resilient portfolios. Rather than relying solely on traditional metrics like beta, volatility, or book-to-market ratios, integrating psychological measures like REL enables investors to develop strategies that reflect real-world investor behavior—where emotions often have a stronger influence than pure analysis. In conclusion, this study contributes to a more comprehensive understanding of investor behavior by introducing the REL variable as a meaningful tool for capturing emotional responses to relative performance. The REL framework enhances traditional regret-based models by including the often-overlooked role of positive emotional feedback. This research demonstrates that asset pricing is shaped not only by fundamentals or rational expectations, but also by how investors feel about their performance in relation to the worst possible outcomes. By identifying and quantifying this emotional comfort, the REL variable illuminates the complex ways in which sentiment influences market outcomes. It offers both theoretical insight and practical guidance for building emotionally aware investment models, reinforcing the view that both positive and negative emotions play a central role in financial decision-making.

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The National Pension Service(NPS) has increased the share of risky assets such as stocks to raise profitability with concerns over fund depletion. If so, has the NPS been making a profit on investments in risky assets so far? If the NPS are making a profit, where is the source of that ability? To answer this question, we directly analyzes the Korean stock portfolio held by the NPS. The objective of this study is to examine the operational performance of NPS investments in the Korean stock market over the past decade, as well as the sources for this performance. The NPS invests in a variety of risky assets, including stocks, bonds, and alternative investments. Of these, domestic stocks account for about 14% of the total as of the end of 2023, amounting to KRW 148 trillion in investments. The NPS is also the largest institutional investor in the domestic stock market and has a huge influence on the market, so it is very important. We obtain the monthly holdings of NPS in domestic stocks from 2009 to 2018 by combining the report on large holdings of stocks reported by the NPS and the trading data from the Korea Exchange (KRX). Specifically, we calculate the transaction history of the NPS from the KRX. The KRX's intraday trading data contains information on the seller and buyer for every transaction, and we use the seller and buyer information to identify the NPS accounts. The process is as follows. First, we obtain the name, dates, quantity and price of purchase and sale stocks from 72,622 reports from 2008 to 2018 in the name of the NPS through the “Report on Large Holdings of Stocks and Other Securities” and “Report on Ownership of Certain Securities by Officers and Major Shareholders.” Second, we identify the NPS accounts by matching the transaction details of each account with the transaction data of the KRX. Based on 72,622 reports, we identify 12,449 NPS accounts from 46 securities firms. This study analyzes the performance of NPS using two methods in addition to the raw portfolio return. First, we evaluate the performance of the NPS using various benchmarks. We examine risk-adjusted returns by using single factor or multi-factor models. However, it has the disadvantage of evaluating the performance based on the assumptions of the risk factor model. Second, we use the Daniel et al. (DGTW, 1997) methodology to decompose returns by controlling for a benchmark portfolio based on firm characteristics. This methodology overcomes the shortcomings of the traditional risk factor model. The main results of the empirical analysis are as follows First, the domestic equity portfolio held by the NPS has an average monthly return of 0.57% over the period from 2009 to 2018. This is equivalent to an annualized rate of 6.84%. The risk-adjusted return using a one-factor model of market returns is 0.31% per month, which is statistically significant. The risk-adjusted return using the Fama-French (1993) three-factor model is 0.49% per month and the risk-adjusted return using the Carhart (1997) four-factor model is 0.48% per month, both statistically significant. This shows that even after controlling for risk, the NPS is still generating significant returns. By year, the risk-adjusted returns are higher and statistically significant mainly in 2012 and 2013. Second, we separate the returns of the NPS into the KOSPI and the KOSDAQ market. The return on the KOSPI stocks is 0.58%, which is much larger than the return on KOSDAQ stocks (-0.01%). The NPS earns most of its returns from investing in the KOSPI market stocks and loses money in the KOSDAQ market. The risk-adjusted returns of the KOSPI stocks are also statistically significant at 0.33%, 0.51%, and 0.51%, respectively, while the risk-adjusted returns of the KOSDAQ stocks are not statistically significant. Overall, the performance of the NPS is better in the KOSPI market than in the KOSDAQ. Third, we decompose the investment performance of NPS according to the methodology of Daniel et al. (DGTW, 1997). DGTW decomposes fund performance into characteristic selectivity (CS), market timing (CT), and average style (AS). The analysis shows that the portfolio return is composed of 0.44% for CS, -0.16% for CT, and 0.30% for AS. The largest return comes from stock selection, while market timing is not significant with a negative return. This result is similar to other studies in the U.S. and Korea that decompose the performance of active funds. When we decompose the portfolio returns of the NPS into the KOSPI and KOSDAQ markets, we also find that the returns of the NPS are mostly due to stock selection ability (CS) and investment style (AS). Our results show that the majority of the NPS's investment performance is attributable to its ability to select Korean equities and average style performance.

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A recent study by Lee and Shin (2022) suggests that changes in the swap basis, defined as the difference between the cross-currency and interest rate swap rates, can predict the one-week ahead changes in the Korean Won-United States Dollar exchange rate. In this study, we propose using the cross-currency and interest rate swap rates as separate predictors, which corresponds to the unrestricted version of the swap basis model. The predictive power of the swap basis may not be stable depending on foreign exchange market and economic conditions, in which case the unrestricted model can better predict exchange rate changes. The unrestricted model shows superior performance in both in-sample and out-of-sample tests, and this result is robust when controlling for potential contemporaneous effects of the swap basis and other instruments, as the predicted variable instead of the original FX return. Our results are also consistent when we use daily and monthly data. In a monthly horizon, the cross-currency swap rate loses its predictive power and the interest rate swap rate tends to be a dominant predictor, which again makes the unrestricted model a better predictive model.

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In this study, we investigate momentum strategies in Japan's stock market, which has historically diverged from global trends in effectiveness. We analyze the performance of three momentum factors—WML, MOM_6, and MOM_12, each differing in weighting, formation, and holding periods. Our findings reveal that while theWML factor with value-weighted portfolios shows positive average returns, their statistical significance is weak. In contrast, MOM factors constructed using equal-weighted portfolios yield negative returns. By examining momentum strategy returns across four market dynamics—BEARDOWN, BEARUP, BULLDOWN, and BULLUP—we find that momentum strategies produce positive returns during BEARDOWN market trends. However, mixed results are observed in BULLUP market between WML factor and MOM factors, and momentum strategies tend to underperform during market reversals, such as BEARUP and BULLDOWN. Given these findings, we applied the framework of Daniel and Moskowitz (2016) to assess whether the poor momentum returns in Japan can be attributed to momentum crashes. Although higher volatility and higher market beta for Loserportfolios are observed in BEAR markets, results suggest that significant momentum crashes do not necessarily coincide with the most volatile months or with the highest market beta for Loser portfolios, challenging the explanation by Daniel and Moskowitz (2016). Our findings indicate that Japan's distinctive market dynamics are key to understanding the underperformance of momentum strategies. While previous studies have emphasized socio-cultural factors, such as Japan's collectivist society, it is crucial to recognize the recent shifts towards individualism and corporate governance reforms. These changes suggest that traditional explanations for momentum strategy failures may not fully apply in Japan, where unique market conditions and an evolving socio-cultural landscape play a more critical role.

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In recent years, easing the estate tax burden has been consistently proposed as a solution to address the “°Korea Discount.”± The central argument is that reducing the current top marginal tax rate of 50% or eliminating the surcharge on shares bequeathed tothe largest shareholder group would help mitigate the tax burden associated with rising stock prices at the time of bequest. This, in turn, is expected to encourage controlling families to focus on enhancing firm value. Another argument is that the high estate tax burden incentivizes controlling shareholders and their families to engage in tunneling as a means of transferring corporate control. As a result, the stock prices of firms involved in such practices tend to be undervalued. It is also argued that reducing the estate tax burden could help mitigate this problem. However, empirical studies supporting this claim are scarce. The only study directly addressing this topic is Yeh and Liao (2018), who conducted an event study based on the Taiwanese government’s policy of reducing the top marginal estate taxrate from 50% to 10%. They found that during the [0, +5] event window, the stock prices of family-controlled firms rose by 1.44% relative to non-family firms, suggesting improved ownership structures in family firms. This study indirectly examines the effect of estatetax relief by analyzing stock price movements immediately following the assessment period for bequeathed share values, defined as two months after the valuation reference date. Prior to the end of the assessment period, stock price increases directly raise the estate tax burden, incentivizing controlling families to suppress stock prices. After the assessment period, however, this incentive disappears abruptly, producing an effect analogous to estate tax relief. This methodological approach offers several significant advantages: it allows research to be conducted even without an actual change in the top marginal tax rate, facilitates more precise estimation of event effects by leveraging the unpredictable nature of death, and expands the number of analyzable events (i.e., instances of death). To utilize this empirical research setting, we collected data on 36 deceased individuals—including group chairmen and their family members—from business groups designated for disclosure by the Korea Fair Trade Commission between 2000 and 2023. At the time of their passing, these individuals collectively held equity stakes in 73 publicly listed affiliate firms. Cases in which the decedent donated their equity holdings to public interest foundations or similar entities were excluded from the sample. Using this data, this study reveals that reducing estatetax burdens does not lead to an increase in stock prices for bequeathed shares. First, no statistically significant differences areobserved in stock price reactions between firms with bequeathed shares and those with non-bequeathed shares within the same business group immediately following the assessment period. This pattern holds consistently when examining buy-and-hold abnormal returns (BHAR) over 3-month, 6-month, and 1-year periods after the assessment. Furthermore, when comparing firms likely to increase dividends to pay estate taxes—those with bequeathed shares and those with family-owned shares but no new bequest—no statistically significant differences in stock price reactions were found. Neither the proportion of bequeathed shares nor the relative value of bequeathed stock shows a significant relationship with stock price movements. This pattern remained consistent even in firms where controlling families exert relatively greater influence on stock prices, such as those with smaller market capitalizations or lower price-to-book ratios (PBR). Similar results were also observed in post-2014 samples following amendments to the Monopoly Regulation and Fair Trade Act that curtailed unfair succession practices. Furthermore, this pattern was evident in firms where group succession was insufficiently advanced, potentially heightening incentives for stock price management. Additionally, the number of investor relations (IR) meetings, as well as R&D and capital expenditures,showed no substantial changes before or after the death of controlling shareholders, suggesting that efforts to enhance firm value were not significantly intensified following their death. Finally, while the age of controlling shareholders was associated with a decline in firm value, this trend was observed across all firms, regardless of whether the controlling shareholder held shares in the firm. This finding contrasts with the expectation that such effects would be limited to firms in which the controlling shareholder holds shares, where incentives to suppress stock prices may increase as mortality risk rises. These findings indicate that the observed decline in firm value is not the result of deliberate efforts by controlling families to suppress stock prices in response to estate tax burdens. Instead, the results challenge the argument that estate tax relief directly leads to significant stock price increases or enhanced firm value.

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We examine a firm’s decision to choose between an equity spin-off and a captive spin-off and the decision’s announcement effect. A captive spin-off, which is a unique form of corporate divestiture in Korea and a few other countries, differs from an equity spin-off in that the spun-off entity remains a wholly owned subsidiary of the parent company and shareholders cannot directly hold ownership stakes in the subsidiary even after the spin-off. On the other hand, in the case of an equity spin-off, which is prevalent in many developed countries such as the U.S., incumbent shareholders receive proportional ownership in the spun-off entity, which typically becomes a publicly listed company after the spin-off. It is well-documented that corporate spin-offs can be beneficial to shareholders because they are likely to reduce negative synergies via refocusing, mitigate information asymmetry, and address relevant agency issues. However, many practitioners in Korea have criticized captive spin-offs, arguing that they can be detrimental to minority shareholders because the controlling owner can decide the spun-off entity’s eventual disposal without shareholder intervention. Despite the notable differences between these two spin-off methods, little has been examined regarding the determinants of firms’ spin-off method choices. We examine a large sample of Korean spin-offs, including both equity and captive spin-offs, from 1998 to 2022. Note that, in our sample, captive spin-offs account for 75.6% (704 spin-offs) of all spin-off activities in Korea, whereas equity spin-offs account for only 24.4% (227 spin-offs). This prevalence of captive spin-offs highlights the importance of our study examining what motivates a firm to choose such a controversial spin-off method. Examining simple mean differences between the two types of spin-offs, we find that captive spin-offs are preferred to equity spin-offs by firms that are smaller, less profitable, younger, investing more, and paying out less. These differences suggest that a firm’s choice of spin-off method can be driven by factors other than agency issues. In our multivariate analysis, we find evidence that a firm’s decision to choose between the two spin-off methods can be affected by market valuations. Specifically, an average parent firm is more likely to choose captive spin-off when it is overvalued relative to its industry peers, whereas it is more likely to choose equity spin-off when it is undervalued relative to its peers. Similarly, firms in overvalued industries are more likely to choose captive spin-offs, while those in undervalued industries are more likely to choose equity spin-offs. Moreover, firms with high growth rates and low cash flows, i.e., those likely in need of capital infusion, are more likely to choose captive spin-offs. Examining market reactions to spin-off announcements, we find that equity spin-off announcements, on average, attract more favorable market reactions in terms of announcement period cumulative abnormal returns than those of captive spin-offs. Further analysis reveals that the average announcement return is highest among undervalued parent firms that chose equity spin-offs, and the return is lowest among overvalued firms that chose captive spin-offs. Also, in the case of the former, announcement returns are on average higher when the spun-off entity is smaller relative to the parent, whereas in the case of the latter, announcement returns are negatively correlated with the spun-off’s relative size. We also examine the effects of a firm’s ownership structure on its choice of spin-off method, focusing on controlling family ownership, affiliated firm ownership, and blockholder ownership. Although we find that blockholder ownership concentration is negatively associated with the likelihood of captive spin-offs, we do not obtain consistent results regarding the other ownership variables. Note, however, that these results should be interpreted with caution because these ownership variables may not fully capture the complex ownership structure of Korean firms. Overall, our results are consistent with the notion that firms may strategically choose the method of their spin-offs to exploit market misvaluation, and such a choice can signal the market regarding their valuations. That is, equity spin-offs can be chosen to allocate undervalued shares to incumbent shareholders, which will attract positive market reactions, whereas captive spin-offs can be used as a means of raising capital using overvalued equities, which will result in less favorable market reactions. Adding to the prevailing view that captive spin-offs are used as a means of minority shareholder expropriation, this study offers another perspective that a firm’s choice between equity and captive spin-offs can be driven by a rational reaction to market misvaluation that is not necessarily disadvantageous to minority shareholders. That is, market reactions to corporate spin-offs in Korea can partly be driven by the signaling effect of firms’ spin-off method choices. Therefore, an assessment of whether a spin-off is detrimental to minority shareholders should consider not only the parent firm’s agency issues but also the market valuations leading up to the firm’s spin-off decision.

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Real estate accounts for the largest share of household wealth globally, with an average share of more than 50% of total wealth. In Korea, this share is even higher, with real estate accounting for approximately 60% of total household assets by 2020. Real estate plays a dual role as a provider of housing and as an important investment vehicle. Given the substantial financial commitment required to purchase residential property, home ownership is often seen as an important means of wealth accumulation for households. In addition, the reliance on institutional credit to finance housing purchases amplifies the impact of housing market fluctuations on household wealth, liabilities and the financial stability of banks. In addition, the historical performance of real estate returns and their relationship to business cycles have important implications for academics, investors, financial institutions, regulators, and policymakers. Despite their importance, however, long-term empirical analyses of real estate returns are scarce due to data limitations. The existing literature on real estate based on long-term data has primarily focused on US and European residential and commercial real estate. For example, Jordà, Knoll, Kuvshinov, and Sehularick (2019) highlight that while average real estate returns are slightly lower than equity returns, they exhibit significantly lower volatility. In this study, we analyze the risk-return trade-off of residential real estate in Korea using comprehensive dataset spanning 47 years from 1975 to 2021, the longest sample period to the best of our knowledge. Specifically, the main objectives of this study are threefold. First, we aim to calculate and analyze the nominal and real total returns, risk premia and Sharpe ratios of Korean real estate. Second, we seek to compare Korean real estate returns with international benchmarks. Finally, we evaluate the inflation hedging potential of real estate by examining its effectiveness in mitigating inflation risk over different investment horizons. Our analysis is based on long-term data obtained from multiple sources such as the Bank for International Settlements (BIS), the Bank of Korea, Korea Exchange, Statistics Korea, Kookmin Bank, Korea Housing Bank, and the Real Estate Board. The nominal total return on real estate is the sum of capital gains and rental income. To account for appraisal smoothing in real estate index returns, we apply the adjustment method proposed by Barkham and Geltner (1994). To calculate the rental income of real estate, weneed to use the jeonse-to-price ratio, which has been published by KB Kookmin Bank since 1998. The jeonse system, which is unique to Korea, requires tenants to pay a lump sum for the use of residential property for a specified period. For the period from 1975 to 1998, when jeonse/price ratio data were not available, we estimated a dynamic regression model using variables such as the jeonse price index from the consumer price index, the housing price index, the GDP growth rate, the expected real interest rate and the 3-year government bond rate. Our empirical results show that the average annual nominal total return for residential real estate is 10.82% with a standard deviation of 11.39%. The real return is 5.30% with a standard deviation of 9.65%. The risk premium for real estate is 2.75% and the Sharpe ratio is 0.26. For the same period, the equity risk premium is 7.64% with the Sharpe ratio of 0.25. The difference in the Sharpe ratios between stocks and real estate is not statistically significant, making it challenging to assert that real estate has outperformed equities over the long term in Korea. When compared with the returns of 16 countries, including the United States, the United Kingdom, and Japan, the Korean real estate market exhibits significantly lower risk premia and Sharpe ratios. These differences are statistically significant, suggesting that the risk-adjusted performance of Korean real estate is relatively weak. If housing provides a hedge against the risks associated with future homeownership, households may be willing to pay higher prices even if the risk-adjusted return is lower. Therefore, if the demand for hedging against future housing costs is relatively higher in Korea than in other countries, it is possible that the risk-adjusted returns may be lower. Our analysis further shows that Korean real estate returns exhibit a statistically significant positive correlation with inflation rates. The correlation coefficient increases with the investment horizon, reaching 0.68 and 0.78 for five-year and ten-year horizons, respectively. These findings suggest that real estate serves as an effective hedge against inflation risk in Korea. It is important to note that this study is limited in that it does not account for taxes and transaction costs associated with ownership and transactions. Future research should address the limitations of our analysis by incorporating transaction costs and taxes, and by exploring the implications of individual transaction-level data for a more granular understanding of the market.

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The globalization of the world economy has facilitated the transmission of risk across stock markets during financial crises. Although not directly financial in nature, macroeconomic uncertainties caused by health and geopolitical crises, such as the recent COVID-19 pandemic and the Russia-Ukraine and Israel-Hamas conflicts, have the potential to trigger shocks that may spill over into global financial markets. In this paper, we investigate the effect of macroeconomic shocks, specifically the COVID-19 pandemic and the Russia-Ukraine and Israel-Hamas wars, on the degree of stock market integration between South Korea and the United States. Previous studies present two opposing perspectives on how these recent shocks may affect global stock market integration. On the one hand, during periods of macroeconomic uncertainty, economic lockdowns or sanctions implemented to mitigate the transmission of shocks may reduce international trade volumes and capital flows, which in turn may weaken stock market linkages. On the other hand, another possibility is that stock market linkages may strengthen independently of the real economy. In the event of a global economic shock, emerging economies such as South Korea tend to implement macroeconomic policies similar to those of the United States to mitigate the impact on the real economy. This policy alignment has the potential to result in enhanced integration of stock markets, irrespective of whether these linkages directly reflect real economic conditions. Therefore, the extent to which stock market linkages are strengthened or weakened in response to macroeconomic shocks is an empirical question that merits attention. Furthermore, the degree of integration may vary depending on the nature of the shock, particularly when the shock manifests in different forms. In order to empirically investigate this issue, the DCC-MGARCH model is applied to the daily log return series of the KOSPI and S&P 500 stock market indices for the period from January 1, 2011 to January 31, 2024. We find that the shocks from the COVID-19 pandemic and geopolitical conflicts do not have uniform effects on stock market integration. In particular, during the COVID-19 pandemic crisis, the Korean stock market exhibited a greater degree of integration with the U.S. stock market than in previous years. However, the degree of stock market integration declined sharply during the Russia-Ukraine war. The results suggest that the simultaneous and multiple shutdowns in numerous countries worldwide during the COVID-19 pandemic, coupled with the implementation of quantitative easing policies to mitigate the impact of shocks, have contributed to an increase in stock market integration. In contrast, geopolitical risks, such as localized wars, appear to result in limited spillovers to stock markets. The results of our study provide valuable insights into the evolution of stock market integration during periods of uncertainty, emphasizing the importance of understanding the dynamic nature of stock market integration. Specifically, we suggest that during macroeconomic crises, both investors and policymakers should tailor their strategies according to the specific nature of the shock in order to diversify risk and optimize potential returns. While global stock market synchronization may potentially limit the efficacy of diversification, particularly during global crises, our findings underscore that the degree of integration between countries can exhibit considerable variability during periods of geopolitical risk. This variability presents opportunities for international diversification, which can assist in risk diversification and expected return enhancement. By taking into account the distinct characteristics of various shocks, policymakers and international investors can more effectively navigate macroeconomic uncertainty and implement more effective strategies for risk management. The significance of this study lies in its contribution of empirical evidence demonstrating that macroeconomic shocks exert differential effects on stock market integration, contingent on the nature of the shock. These findings bear significant ramifications for the formulation of government macroeconomic policy, the strategic portfolio composition of international investors, and the advancement of academic knowledge in this field. The study's analysis of the dynamic response of stock markets to diverse macroeconomic shocks, as influenced by their nature, provides a comprehensive framework for understanding these interactions.

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Mini KOSPI 200 options are derivatives based on the KOSPI 200 index, just like the regular KOSPI 200 options. While the contract terms, such as expiration dates and trading hours, are identical, mini options are structured to allow smaller investments by reducing the contract size to one-fifth (from a multiplier of 250,000 KRW to 50,000 KRW). This makes them accessible to smaller investors, aiming to increase retail participation. However, the question remains: have mini options successfully attracted retail investors as originally intended? As market data reveals, the share of retail investors in the mini options market is significantly lower than in the regular options market, contrary to the product’s initial purpose. Institutional investors, particularly securities firms, dominate the mini options market, contributing to its low liquidity. As a result, the liquidity premium in mini options leads to higher pricing compared to regular options with the same strike prices and expiration dates. This creates a barrier for retail investors, who generally prefer long positions and are sensitive to price disparities. Therefore, mini options have not achieved their goal of increasing retail participation and are instead primarily traded by institutional investors. The difference in liquidity and the composition of market participants leads to differing price determination mechanisms between mini and regular options. The distinct characteristics of the mini options market suggest that the optimal option pricing models suitable for regular options may not be applicable to mini options. The Black-Scholes (BS) option pricing model, introduced in 1973, has long been a fundamental tool in the options market, but its limitations have led to the development of many alternatives. The BS model, while advantageous for its simplicity and closed-form solution, fails to accurately reflect real-world variables like volatility and risk-free interest rates. Implied volatility, which is calculated based on option prices, tends to vary with strike prices and expiration times, a phenomenon known as the volatility surface, indicating that the BS model does not fully capture market realities. To overcome these limitations, various alternative models have been proposed, including stochastic interest rate models, stochastic volatility models, jump diffusion models, variance gamma models, and regime-switching models that assume sudden changes in volatility. GARCH models that assume conditional heteroscedasticity in the underlying asset are also used. Additionally, the Ad-Hoc Black-Scholes (AHBS) model is popular among market participants for estimating implied volatility using simple regression analysis. Previous research has shown that stochastic volatility models offer the greatest improvement over the BS model. Studies focused on the regular options market found that the AHBS model outperforms more mathematically complex models, including stochastic volatility models, in both pricing accuracy and hedging performance. Given that mini options display characteristics distinct from regular options, it is necessary to question whether the optimal pricing models used for regular options can still be applied effectively. This study aims to identify the optimal option pricing model for the mini KOSPI 200 options market. By comparing in-sample and out-of-sample pricing accuracy and hedging performance, we aim to recommend the most suitable model for participants in the mini options market. The models under consideration include the BS model, the AHBS model, and models that account for stochastic volatility and jumps. Through this comparison, we examine how differences in liquidity and the composition of market participants affect option pricing and hedging. The study suggests that markets with a high proportion of retail investors may favor simpler models like the BS model, while markets dominated by institutional investors might see better performance with more mathematically complex models. Given that the mini options market has a lower proportion of retail investors compared to regular options, it is expected that more sophisticated models that account for stochastic volatility and jumps will outperform simpler models like the BS model. This study provides several contributions to existing research. First, it is the first to explore the optimal options pricing model specifically for the mini KOSPI 200 options market. While mini options share many characteristics with regular options, their smaller contract sizes and different participantcomposition create unique market dynamics. The study shows that institutional investors play a larger role in the mini options market than in the regular options market, and that mini options have lower liquidity. These factors must be considered when selecting the optimal pricing model. Second, this research utilizes long-term data spanning 90 months, from the market’s inception to the present, offering a comprehensive view of the market’s evolution. Most previous studies focused on the early stages of the mini options market, where liquidity was insufficient. By incorporating a longer time frame, this study is able to capture the effects of market maturity and changes in volatility and liquidity over time. The results are as follows. Models that account for both stochastic volatility and jumps show the best performance in both in-sample and out-of-sample pricing tests. In terms of hedging performance, the AHBS model that includes both first-order and second-order strike prices performs the best. However, the differences in hedging performance across models are relatively small. When the forecasting period is extended to one week, the results remain consistent with the one-day forecast. Monthly performance also shows consistency, with statistically significant differences between the models' performance over the entire sample period. Compared to previous studies on the regular options market, which found that simpler AHBS models provided the best pricing and hedging performance, this study reaches different conclusions. The differences in liquidity and participant composition between the mini and regular options markets play a significant role in the selection of the optimal pricing model.

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This paper explorers the contributing factors to the Terra (UST)-Luna crash in May 2022. We argue that the crash was primarily fueled by the unsustainable interest rates offered by the Anchor Protocol. Initially, Terra was designed to facilitate fee-free payments and ensure stability through a diversified demand base from payment services. However, the launch of the Anchor Protocol in 2021, with its 19.45% interest rate, shifted UST's focus towards speculative demand. This change led to an unsustainable increase in UST's supply, ultimately triggering a run from Terra. We discuss flaws in the governance mechanism for setting Anchor Protocol's interest rates. The exorbitant yield offered by the Anchor Protocol significantly contributed to undermining Terra's long-term stability. The speculative demand incited by the Anchor Protocol's high interest rates was likely a major factor in the Terra collapse in May 2022.

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Due to the influential works of Fama and French (1992, 1993), the value premium often refers to the book-to-market effect although there are alternative valuation measures. Recent evidence indicates that the book-to-market effect has weakened over time or even disappeared in the U.S. stock market. The literature suggests that, even in the Korean stock market, the value premium measured by an individual valuation ratio, including book-to-market, may significantly fluctuate over time, and a value factor constructed based solely on the book-to-market ratio may not capture the true value premium. This study aims to verify the predictability of value premiums based on various valuation measures, not just the book-to-market equity ratio, and to identify which value predictor is consistently useful in the Korean stock market over a long period from 1987 to 2023. We further attempt to investigate why the most useful valuation measure has a better predictive performance than others. To this end, we consider six valuation measures, including the book-to-market ratio, retained earnings-to-market ratio, contributed capital-to-market ratio, earnings-toprice ratio, cash flow-to-price ratio, and dividend-to-price ratio. The main findings are summarized as follows. First, except the contributed capital-to-market ratio, all alternative value measures can significantly predict the cross-section of stock returns when book-to-market is controlled for. The most significant is retained earnings-to-market, followed by dividend-to-price, and these two measures predict value premiums more strongly than the book-to-market ratio. The results are consistent with Ball et al. (2020) in that retained earnings-to-market is a strong predictor of the value premium whereas contributed capital-to-market is not, but controlling for the retained earnings-to-market ratio does not eliminate the predictive power of book-to-market in Korea. Second, we construct value factors based on each of the six valuation measures to compare their historical performance and find that the HML factor, which represents the book-to-market effect, has a Sharpe ratio of 0.35 in the period prior to July 2005 and 0.83 in the period after July 2005, indicating a stronger recent performance unlike in the U.S. market. However, when compared to alternative value factors based on useful valuation measures, the HML factor performs worst before July 2005 and best after July 2005, which implies that the book-to-market effect substantially varies over time, as in the U.S. market. On the other hand, the retained earnings-to-market factor has the highest Sharpe ratio of 0.64 throughout the sample period and almost equal Sharpe ratios during the periods before and after July 2005. In addition, the retained earnings-to-market factor has higher correlations with the earnings-to-price, cash flow-to-price, and dividend-to-price factors than the HML factor. Therefore, retained earnings-tomarket is the strongest and most reliable predictor of the true value premium in any period. The HML factor incorporates not only the useful information contained in retained earnings-to-market but also the information in contributed capital-to-market, which has little to do with the value premium, and as a result, it performs worse in periods when it is highly affected by contributed capital-to-market. In this sense, the HML factor may be a relatively unstable indicator of the true value premium. Third, in spanning regressions, the retained earnings-to-market factor subsumes all other value factors, including HML, and has additional information that the other value factors do not have. The next most valuable value factor is the one based on the dividend-to-price ratio. The remaining value factors and the HML factor do not seem to capture all of the information from each other and their priority is not clear. As a result, the value factor that is most useful as an asset pricing factor seems to be the retained earnings-to-market factor. Finally, considering that retained earnings represent the difference between accumulated earnings and accumulated dividends over the firm’s history, we investigate whether accumulated earnings or accumulated dividends over recent years are more responsible for predicting the cross-section of expected returns and find that accumulated dividends, rather than accumulated earnings, primarily drive the predictive power of retained earnings-to-market in Korea. Moreover, we find that retained earnings-to-market can strongly predict the growth in earnings over two to three years. In contrast, the book-to-market, cash flow-to-price, dividend-toprice ratios do not predict earnings growth. Therefore, the outperformance of retained earnings-to-market as a predictor of the value premium may be related to useful information about future earnings growth. Although we show that the book-to-market effect has recently become stronger in Korea, unlike in the U.S., our findings are consistent with recent evidence in the U.S. market in that the book-to-market effect may not always represent a true value premium. Our findings consistently show that the retained earnings-to-market ratio is the best predictor of the value premium among well-known and easily observable valuation measures. Moreover, our results of spanning tests suggest that it may be desired to construct a value factor based on retained earnings-to-market rather than book-to-market in asset pricing models.

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We investigate the factors influencing investors' decision-making in the Korean mutual fund market. Our findings indicate that investors prioritize simple signals when allocating capital to mutual funds, such as excess returns on benchmarks designated by fund rating companies or market indices like KOSPI and KOSPI200. Conversely, investors are less inclined to use sophisticated asset pricing models, including the CAPM (Capital Asset Pricing Model), Fama and French (1993) Three-factor model, and Carhart (1997) Four-factor model. Notably, institutional investors are more likely than retail investors to utilize these asset pricing models when selecting mutual funds. Our results remain robust even when accounting for observations following the Global Financial Crisis (GFC), extreme returns, and changes in fund ratings provided by rating agencies. Furthermore, we demonstrate that the weighting of time-series fund flow-performance sensitivity does not affect our conclusions. Our research suggests that in Korea's mutual fund market, investors tend to rely on straightforward indicators rather than the complex pricing models proposed by earlier studies. Importantly, our results suggest that this preference for simple indicators among retail investors is not unique to any specific country. We conclude that retail investors generally lack the level of financial literacy required to effectively use risk-adjusted performance measures.

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Research suggests that overconfident managers often harm firm value by taking excessive risks due to overly optimistic future outlooks or inflated self-assessments (Griffin and Tversky, 1992; Malmendier and Tate, 2008). Overconfident CEOs are reported to overestimate the expected returns from uncertain ventures. However, Hirshleifer, Low, and Teoh (2012) present evidence that overconfident CEOs, who tend to be more enthusiastic about challenging and risky projects, invest more in innovation and often succeed, introducing the "overconfident manager puzzle" where such managers enhance rather than damage firm value. This study aims to test these conflicting findings in the context of Korean firms. It explores the hypothesis that optimistic managers—unlike overconfidence, which is traditionally viewed as harming firm value through overinvestment—might instead be innovators who enhance firm value. The study utilizes a novel methodology involving machine learning to measure managerial overconfidence. Unlike U.S. studies that often use stock options as indicators, this research leverages text analysis of managerial opinions disclosed in business reports, using the BERT machine learning model to quantify optimism. The ambiguity in measuring overconfidence in previous studies is another consideration. Psychologically, overconfidence is seen as an irrational bias, but empirical variables might capture a manager’s rational optimism about the future. If a manager’s outlook is rational, overconfidence could lead to positive outcomes, unlike the negative connotations typically associated with it. Many studies interchange overconfidence with optimism, where the former implies irrational excessive confidence and the latter signifies a positive future outlook. Generally, overconfident CEOs are believed to make poor decisions by overestimating future performance and underestimating risks, leading to value-destroying mergers and acquisitions (Malmendier and Tate, 2005, 2008). Such CEOs are often reported to overpay in M&A deals, necessitating strict control through compensation and governance structures. Overconfident managers also tend to invest more than their less confident counterparts, potentially harming firm value through overinvestment (Moez and Amina, 2008; Chen, Ho, and Ho, 2014). Conversely, some researchers highlight the positive roles of overconfidence. It can enhance decision-making execution, encourage necessary risk-taking for shareholder benefit, and stimulate entrepreneurial activities (Russo and Schoemaker, 1992; Goel and Thaker, 2008; Bernardo and Welch, 2001). Hirshleifer et al. (2012) found that overconfidence negatively impacts acquisitions but positively influences innovation. They suggest that overconfident managers in firms with innovation opportunities can achieve significant success, unlike those in firms without such opportunities who might make detrimental acquisition decisions. The study’s empirical analysis yielded several key findings. First, contrary to expectations, there was a negative relationship between CEO Optimism and risk, as measured by stock return volatility, suggesting that optimistic CEOs do not prefer riskier projects unlike overconfident CEOs. However, this relationship turned positive when controlling for capital availability, indicating that optimistic CEOs choose risky projects when capital is accessible. This implies that the measure of optimism might reflect rational optimism rather than irrational bias. Second, optimistic CEOs were found to increase R&D investments and engage more in innovation activities, such as filing patents. Third, they tend to hold more cash to seize future investment opportunities. Last, optimistic CEOs were confirmed to enhance firm value, aligning with Hirshleifer et al. (2012), suggesting that they are rational optimists driving innovation rather than irrationally overconfident leaders. In conclusion, the study reaffirms that optimistic managers can be seen as rational optimists whose confidence drives innovation and firm value enhancement, challenging the traditional view of overconfidence as purely detrimental.

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Previous studies have examined how credit ratings are associated with corporate financial decisions by focusing on their linear relationship (e.g., Baghai, Servaes, and Tamayo, 2014; Khieu and Pyles, 2016; Jung and Kim, 2018; Kim and Kim, 2019; Jeon and Lee, 2020). However, this relationship is not likely to be linear because market recognition on credit ratings and financial regulations are affected by alphabetic ratings (Kisgen, 2006). For example, firms near credit rating upgrade (a rating designated with "+") or downgrade (a rating designated with "-") have stronger incentives to obtain a credit rating jump or avoid a credit rating downgrade than these not near credit rating change issue, resulting in different corporate financial decisions. In this paper, we thus examine how the likelihood of credit rating changes affects corporate financial policies. We hypothesize that firms near credit rating changes are more likely to have conservative financial policies than these not near rating changes. Our hypothesisis based on two reasoning. First, firms closer to credit rating changes are more likely to pursue conservative financial decisions to reduce the cost of raising capital. Because credit ratings are a significant factor to determine the cost of raising capital, firms near a rating change issue are more concerned about possible changes in their cost of capital. Hence, firms with a plus (minus) rating will be more conservative regarding their financial decisions to obtain the higher rating (maintain the current rating) than these without a plus (minus) rating. Second, firms near a change in rating are likely to choose more conservative policies to meet the investment criteria of financial institutions. Financial institutions face several regulations with respect to their investments. Under the regulations, a firm’s credit rating is one of important criteria to decide the investments of financial institutions. Therefore, firms with a minus (plus) rating are motivated to set greater conservative policiesto maintain current investments (obtain new investments) from financial institutions than these not near a rating change issue. To test our conjecture, we use data on credit ratings to Korean firms over the 2011-2022 period. Following Kisgen (2006), We define firms with a plus (+) or minus (-) rating as these closer to rating changes (upgrade or downgrade). Using the rating outlook data, we also define firms with a "Positive" or "Negative" ("Stable") outlook as these near (not near) rating changes. Moreover, we measure corporate financial policies using a firm’s leverage, dividend, and cash holdings. Our final sample includes 2,736 firm-year observations between 2011 and 2022. We find that firms with a plus or minus rating tend to use less debt, pay less dividend, and hold more cash than these without a plus or minus rating. We further find that firms with a "Positive" or "Negative"outlook are likely to borrow less, pay less dividend, and reserve more cash than these with a "Stable" outlook. The results suggest that firms more prone to rating changes are more likely to have conservative financial policies to reduce the cost of raising capital and meet the investment criteria of financial institutions. In addition, our findings remain consistent after mitigating endogeneity issues subject to reverse causality, omitted variable bias, and measurement errors. Specifically, our results persist when we re-estimate the likelihood of credit rating changes using the rating outlook data and perform propensity score matching analysis and system generalized method of moments (GMM) estimations. Unlike the previous literature that hasexamined on a linear relationship between credit ratings and corporate decisions, this paper contributes to the corporate finance literature by suggesting a non-linear relationship between the likelihood of credit rating changes and corporate financial policies. Furthermore, while existing studies on credit rating changes have focused on capital structure (Kisgen, 2006; Kim, Seol, and Kim, 2007; Kim and Yoon, 2013), earnings management (Kim, 2016), cost behavior (Kim and Chung, 2017), corporate governance (Hong and Kim, 2019), and voluntary disclosure incentive (Kim, 2022), this paper adds to the literature by exploring various corporate financial policies and enriching the understanding of corporate decisions with respect to credit rating concerns.

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This study is a study to empirically confirm the insolvency risk caused by the induction of large-sized securities companies after the introduction of the comprehensive financial investment business (extra-large securities companies) policy in the Korean capital market. Since the introduction of the polcy, there have been concerns that the expansion of the business scope of securities firms may expose them to various risks, such as high-risk investments due to leverage expansion, concentration of real estate PF assets deepening, and credit risk and interest rate risk due to trading of derivatives-linked securities. In this study, the impact of equity capital on insolvency risk was analyzed using a panel regression model for 39 domestic securities firms from the first quarter of 2009 to the fourth quarter of 2016, before and after the introduction of the policy in October 2013. Among previous studies, studies that presented positive results regarding the enlargement of financial companies focused on individual financial companies, while studies that presented negative results focused on the perspective of the financial system as a whole. The introduction of comprehensive financial investment businesses, which was the focus of this study, is a topic from the financial system perspective, so it is appropriate to conservatively examine the impact of policy introduction. Therefore, this study established the hypothesis that “the enlargement of securities companies following the introduction of the comprehensive financial investment business policy increases their insolvency risk.” The dependent variable of the analysis model is the natural logarithm of the default risk variables (EDF and Z-Score), and the independent variable is the amount of equity capital (natural logarithm) of individual securities companies. Other control variables include asset size (total assets (natural logarithm)), capital adequacy (NCR), profitability (ROE), asset soundness (NPL), and macroeconomic variables (GDP growth rate, housing price fluctuation rate, KOSPI growth rate). As a result, first, although securities companies are becoming larger in line with the purpose of introducing the comprehensive financial investment business policy, it was confirmed that their insolvency risk increased after the introduction of the policy. In other words, in the case of large securities companies, EDF increased and Z-Score decreased. Second, especially for super-large securities companies with equity capital of KRW 3 trillion or more, their insolvency risk increased significantly in proportion to the size of equity capital after the introduction of the policy, which can be attributed to the risk exposure due to the expansion of the scope of business. These results suggests the following: First, it needs to be intended to promote stability in the capital market by actively supervising the risk-seeking business of large securities companies following deregulation, and establishing risk-monitoring system in terms of macroprudentiality that can immediately intervene in their insolvency. Second, It can urge the awakening of all securities industry. In particular, in the process of reorganizing the sales and profit structures of securities industry due to the policy, it can be suggested that policies such as specialization strategies for small and medium-sized securities companies in order to minimize the negative impact of the relative weakening of their competitiveness. Finally, companies seeking to access the capital market can be expected to actively monitor the securities firms they deal with. This perspective is especially useful for small and medium-sized businesses. The insolvency risk of financial companies is inversely proportional to the financial inclusion of small and medium-sized businesses. Above all, without undermining financial stability, coordination and cooperation of market participants such as companies, investors, intermediaries, and advisors, as well as regulatory policies of policy authorities are of utmost importance.

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This study investigates the anti-manipulation effects of average futures within a generalized framework. Our primary contributions include revising and extending the anti-manipulation features proposed by Yoo (2015) and providing an in-depth comparison of existing anti-manipulation settlement mechanisms and average futures in terms of their efficacy as manipulation deterrents. We find that the anti-manipulation effects are weaker than in Yoo (2015) if a manipulator engages in an average futures contract with a smaller contract multiplier or more reference dates, manipulates it not only on its expiration date but also on other reference dates, or if the price momentum of the underlying asset due to the manipulation is stronger. Additionally, average futures effectively deter manipulation and help preserve market stability, unlike traditional anti-manipulation mechanisms that often distort prices. This comprehensive comparison underscores the advantages of using average futures to maintain market equilibrium and mitigate manipulation.

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