This paper estimates the empirical pricing kernels (EPK) implied by the KOSPI 200 options using the reverse engineering technique suggested by Rosenberg and Engle (2002). The empirical pricing kernels are estimated as a power function as well as a polynomial function of the returns of the underlying index. The empirical results documented in this paper are as follows： First, the empirical performance of the power pricing kernel is worse than that of the polynomial pricing kernel that contains more parameters and so is more flexible than the power pricing kernel. This contrasts to the results of Rosenberg and Engle (2002), which investigate the S&P 500 options market. Second, the pricing and forecasting ability of the EPK deteriorate if we estimate the EPK by imposing the restriction that the EPK prices the short term bond exactly. While the amount of the deterioration is large in the case of the power pricing kernel, it is relatively small in the case of the polynomial pricing kernel. The hedging performance with the restriction is almost the same as or sometimes better than the one without the restriction, depending on the hedging method. Third, the empirical performance of time-invariant EPKs is generally poor. The difference in the empirical performance between the time-invariant EPK and the time varying EPK is more prominent in the case of polynomial EPK. The hedging performance of time-invariant EPKs is sometimes better than that of the time-varying EPKs in the case of power EPK. Fourth, the polynomial EPK is more sensitive to the underlying return state compared to the power EPK. The shape of the polynomial EPK that is a function of the underlying return state fluctuates more and reflects the non-linearity of the pricing kernel better than the power EPK. The estimated power EPKs tend to decrease as the underlying return increase. This implies the marginal utilities of investors decrease with the underlying return. Fifth, the risk aversion implied by the EPK is time varying and it has a statistically significant relation with the KOSPI 200 index return and the lag value of the risk aversion.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

It is believed that the value of common stock is the sum of the values of cash flow and voting rights. According to Zingales(1994), the value of voting rights is increasing as the private benefits of control is getting greater. We show that the stock price reflects the value of voting rights when two party is fighting to get the control power of the firm. This paper also shows the existence of the voting right capture strategy, which is a profit seeking strategy that consists of buying stocks before the date of record and selling those stocks right after the date of record. In addition, we find some supporting empirical evidences of the existence of the voting right capture strategy from a sample of 17 domestic companies which experienced keen control power conflicts between 2000 and 2006.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper presents existence and sources of long-term reversal in the Korean stock market. During the past 15 years, return reversals from the past performances of individual stocks, which are listed in the Korean Stock Exchange, existed significantly, in terms of buy-and-hold abnormal returns. We found that cross-sectional contrarian premiums over 1- to 36-month holding periods were significantly positive during the period of Aril, 1987 to April, 2002. The sources of these premiums, however, were differently analyzed according to the past portfolio formation periods. In the 12 months formation period, the contrarian premiums were found to result mainly from the systematic risk factors of Fama-French 3 factor model, but the premiums in the 24 and 36 months formation periods were not due to the systematic risk factors, but to the hypothesis of behavioral finance that the overreaction increases with the length of formation period. Additionally, we analyzed the sources of contrarian premiums in the two sub-sample periods, up- and down-market periods. In the down market period, co-skewness factor premiums were found to play an important role for explaining the contrarian premiums, but in the up market period, contrarian premiums were found to be an evidence of weak-form market inefficiency which could not be explained from any asset pricing model.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

We examined how the illiquidity premium affects the portfolio returns for all the stocks listed on the Stock Market Division and the KOSDAQ Market Division of the Korea Exchange (KRX). We used the daily relative spread as a proxy variable for illiquidity which was calculated using the bid-ask spread for each stock at the daily closing session. We estimated the beta using weekly returns for each stock. Our sample period runs 10 years, from April 1996 to March 2006. Our conclusions are as follows. First, using the cross-sectional regressions presented in Fama and Macbeth(1973), we found that the relative spread is a significant and robust characteristic variable in explaining the expected excess return for each portfolio. The explanatory power of the relative spread for the expected excess return was significant for all the regression models. Second, using the time-series regressions presented in Fama and French(1993), the illiquidity risk factor IMV explained the expected portfolio excess return in about 60% of all portfolios. However, in the case of the KRX data, the economic significance of IMV was limited; The single-factor model that used IMV as its sole factor explains the expected portfolio excess return. However, no other meaningful model specification was found when combining or using other explanatory factors like the market risk factor MKT, the size factor SMB or the B/M factor HML. This is in contrast to the case of US markets for which SMB and HML reportedly have their own economic significance when added to a single-factor model that uses MKT. Third, analyzing two market divisions of the KRX separately by multiple regressions, we found that the statistical significances of relative spread in the Stock Market Division was very strong, while the statistical significance in the KOSDAQ Division was weak. In addition, we made a robustness check of cross-sectional and time-series analyses using the beta estimated by using daily returns for each stock and found that the explanatory power of relative spread for the expected excess return for each portfolio became very limited. This suggests that the economic significance of relative spread differs from the stock returns we use to estimate beta.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

We empirically examine a hypothesis that day-traders in Korean stock market provide liquidity. Since day-traders submit orders frequently and are considered to be more sophisticated than other individuals, they behave almost like dealers. As dealers in a quote-driven stock exchange trade frequently and consider their inventory risk, day-traders do the same even though they may not realize their trading as dealer-like trading. In this paper, we define a trader who buys and sells a stock at least one times in a day as a day-trader. As robustness checks, we use different definitions of a day-trader and the results are almost the same. Based upon this definition, in Korean stock market, almost 30% of trading belongs to day-trading. This high percentage also insures the importance to analyze day-trading in Korean market. To analyze whether day-traders provide liquidity, first we investigate which type of orders day- traders submit most. Day-traders submit more best bid/ask orders compared to other traders. Also, day-traders who trade more frequently seem to behave more like liquidity providers. Since liquidity provision is most beneficial in trades of less frequently traded stocks, i.e. presumably less liquid stocks, we compare the trading behaviors of day-traders across different stocks. The less trading a stock has, the more effective day-traders' trading in terms of liquidity provision. The spread of prices is decreased more and depth is increased more for stocks with less trading. Since we do not have official liquidity providers in the Korean stock exchange (an order-driven market) such as dealers in the NASDAQ, day-traders' function as liquidity providers seem to be beneficial especially for illiquid stocks. We also investigate how day-trading in a period affects the liquidity in the next period. If there exists more day-trading and resulting liquidity provision, more other traders feel like trading without worrying about liquidity. This additional trading from others actually improves the market liquidity much more than the effect from day-trading. By looking into the spread, depth, and market impact cost in the next period following day-trading, we observe that day-trading in a period actually improve the market condition. However, we also find the limitation of day-trading effect on liquidity that day-trading cannot sustain its liquidity provision long and large enough especially for less liquid stocks. Since these less liquid stocks need most liquidity provision, we acknowledge that liquidity provision by day-traders should be supplemented to these stocks by specifically appointed liquidity providers, such as ones in the ELW market in Korea.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper derives no arbitrage moment bounds from Fama and French 25 portfolios(FF25) and tests stochastic discount factor models through them. We compare the result of moment diagnosis test with that of generalized method of moment(GMM) test and Hansen and Jagannathan(1997)’s minimum distance(H-J distance) test. The result is the following. The greatest lower bound of moment for FF25 is marginally increasing with the order of moment. This phenomenon is inferred to be occurred from fat-tail property in security market data including FF25. But most of constant parameter models in our research do not satisfy these moment conditions from the second to the fourth and therefore cannot be among no arbitrage stochastic discount factor set for FF25. But some of time-varying parameter models in our research satisfy these conditions and some of them are not rejected at given significance level in H-J distance test. This implies that instrumental variables in conjunction with models are effective to price FF25.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

In this paper, we explore the historical equity premiums in Korean stock market, and examine whether there is equity premium puzzle in Korean market, which is, as noted in Siegel(1998) and Campbell(2001), universally observed in major financial markets. We, however, find that equity premiums in Korean market are very small, and conclude that there is no equity premium puzzle in Korean market. There may be several reasons that equity premium puzzle is not observed in Korean market: short sample period, errors in estimating risk free rates, very low risk aversion, and/or undervaluation of Korean stock market. Among these factors, we argue that undervaluation is the most responsible factor for low equity premiums. We estimate equity returns with fundamentals such as dividends and earnings, then calculate equity premiums. We find that equity premiums estimated with fundamentals are much large than historical equity premiums. This implies that Korean stock market may not be free from equity premium puzzle.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This paper examines the effects of an option to wait to invest on a firm's financing and investment decisions when capital markets suffer from asymmetric information regarding the profitability of the firm's investment project. We focus on the role of such an option available to the firm as a means to avoid mis-pricing in the spot capital markets. Under symmetric information, financing becomes irrelevant as the firm makes its investment decision efficiently. Here, the option to wait functions only as a means of minimizing its burden of capital cost at the expense of the first mover's advantage. Under asymmetric information, we show that relatively undervalued firms prefer debt financing whereas relatively overvalued ones prefer equity financing. This holds because an undervalued firm can minimize loss from undervaluation by issuing debt whereas an overvalued firm can maximize benefit from overvaluation by issuing equity. As a result, the equity market is always populated by overvalued firms and hence is bound to fail. In equilibrium, therefore, only debt market may open. In equilibrium, firms' behavior goes as follows. A firm with a superior project defers investment in order to avoid mis-pricing applicable in the debt market, anticipating that informational asymmetry will disappear in the next period so that it can finance at a fair market price based on its true profitability. A firm with an inferior project gives up investment because even the maximum payoff from investment is no greater than the debt obligation. All the remaining firms with medium quality projects make investments by raising funds in the debt market.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This study empirically examines the price effect of abnormal order imbalances for Korea stocks from January 2003 to January 2005 according to classifications by trade initiators (buyer-initiated or seller-initiated), investor type(domestic individual, domestic institution, and foreigner) and firm size. First of all, in vector autoregression analysis by using all daily returns and order imbalances, both information effect and liquidity effect are shown. However, in VAR analysis with daily returns and order imbalances when large order imbalance occurs, this liquidity effect is inferred to be caused by domestic individual investors. This is supported by the results in event study; an event is defined as a day when a particular investor group forces order imbalance higher or lower than standard deviation of all daily order imbalances on a particular firm around its mean. In events by domestic institutions and foreigners, changes of prices along to the directions of large order imbalances are not reversed for 4 or 5 days after the events. Additionally, net trading volumes also are similar to order imbalances in magnitude and direction. However, for events done by domestic individual investors, around the event day, cumulative excess returns are widely reversed. Furthermore, order imbalances of domestic individual group are ten times as big as net trading volume of the investor group. This may be because of big heterogeneity in opinion about future price movement in a domestic individual group. Finally, as size of firm increases, the impact of information effect of all investor groups order imbalances seems to increase.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel

This article investigated the relevance of the skewed Student-t distribution innovation in analyzing volatility stylized facts, namely, volatility clustering, volatility asymmetry, and volatility persistence, in three individual Korean shares. For this purpose, we assessed the performance of RiskMetrics and two long memory Value-at-Risk (VaR) models (FIGARCH and FIAPARCH) with the normal, Student-t, and skewed Student-t distribution innovations. From the results of the empirical VaR analysis, the skewed Student-t distribution innovation provided more accurate VaR calculations, in capturing stylized facts in the volatility of three sample returns. Thus, the correct assumption of return distribution might improve the estimated performance of VaR models in the Korean stock market.

• EndNote
• RefWorks
• Scholar's Aid
• BibTeX

Export Citation Cancel