Finance theory suggests that there should be a positive relationship between risk and the risk premium. Investors demand compensation for holding risky assets, and how much compensation they demand is related to both the degree of risk aversion and the amount of risk. Extensive empirical evidence in the past several decades also suggests that risk premium varies over time with strong association with business cycle, which implies that the relation between risk and the risk premium is also likely to vary over time. Motivated by these theory and empirical evidence, we examine time-varying risk-return relationship by estimating the relative risk aversion coefficient using consumption-based measures as state variables, aiming to capture the conditional relation between risk and the risk premium. A number of consumption-based measures have been proposed as forecasting variables for asset returns such as the surplus consumption ratio (Campbell and Cochrane, 1999; Wachter 2006), the labor income to consumption ratio (Santos and Veronesi, 2006), and the consumption-aggregate wealth ratio (Lettau and Ludvgison, 2001). Campbell and Cochrane (1999) introduce habit persistence to their asset pricing model and use the surplus consumption ratio as a proxy for time-varying relative risk aversion and Wachter (2006) uses a proxy for the surplus consumption ratio to extend the model to the bond market. The model of Santos and Veronesi (2003) implies that the ratio of labor income to consumption is inversely related to the conditional covariance between asset return and consumption. Therefore, the ratio is also inversely related to the risk premium. Lettau and Ludvigson (2001, 2005) introduce CAY, which measures deviation of consumption from its stable relationship with wealth. As consumers’ trading of financial assets is motivated by a desire to smooth consumption both over time and across states, CAY has the predictive power for the risk premium. Park, Eom, and Hahn (2019) constructs three consumption-based measures using Korean data and shows that these measures have predictive ability for the equity, bond, and housing risk premia in Korea. Their findings suggest that the consumption-based measures capture the information relevant for time-varying risk premium in Korea and can be used as state variables for empirical analysis. We estimate the relative risk aversion coefficient in the framework of Merton (1973)’s ICAPM by using three consumption-based measures as state-variables for the risk aversion. In constructing four proxies for the surplus consumption ratio, we use two estimation procedures based on Campbell and Cochrane (1999) and Wachter (2006) with two persistency parameter estimates. We follow Park, Eom, and Hahn (2019) to calculate the labor income to consumption ratio and CAY. We use both monthly and quarterly excess return data from April 1988 to March 2016. Two conditional variance models (GARCH(1,1)-M and EGARCH(1,1)-M) are estimated by the overlapping data inference (ODIN) method suggested by Hedegaard and Hodrick (2016). We also include five control variables which are the relative risk free rate, term premium, default premium, business cycle indicator, and industrial production. The main findings are as follows. First, when we use the proxy for the surplus consumption ratio as a state variable, we find a positive relationship between risk and the risk premium. The surplus consumption ratio has the statistically significant explanatory power of the relative risk aversion coefficient. Second, the main results are consistent across various cases of using monthly and quarterly excess return data, using GARCH(1,1)-M and EGARCH(1,1)-M models, and including control variables which are related to business cycle. Third, the explanatory power of the surplus consumption ratio is robust to using four alternative proxies used in this study. Finally, when we use the labor income to consumption ratio by Santos and Veronesi (2003) as a state variable, we also obtain some significantly positive time-varying risk-return relationship. However, we fail to obtain significant results when we use the consumption-aggregate wealth ratio by Lettau and Ludvigson (2001, 2005) as a state variable. Taken together, our empirical findings suggest that the relationship between risk and the risk premium should be investigated in a conditional setting, one of which is the model of Campbell and Cochrane (1999) with time-varying risk aversion.

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The importance of a firm’s innovation is emphasized because the innovation can promote not only a firm’s competitiveness but also viability(Park, Park, and Cho, 2006; Jeon and Lee, 2015). However, in Korea, little literature has been explored the relationship between firms’ innovation and cost of debt capital. Therefore, we investigate the effects of innovation on the cost of debt capital by using KOSPI-listed companies. In addition, we examine if there are any differences in the relationships between innovation and cost of debt capital when companies belong to the high-tech or non-high-tech industries. We also analyze how the interaction term between innovation and pay equality can affect the cost of debt. This paper proxies the level of a firm’s innovation by using the number of granted patents. For this, we collect patent data from KIPRIS(Korea Intellectual Property Rights Information Service) of the Korean Intellectual Property Office. As a proxy of firm’s innovation level, the patent data could be more suitable than research and development expenditure data because the granted patents can be recognized as the output of innovation activities(Choi, 2018). The main results can be summarized into three parts. First, in our regression, the number of granted patents as a proxy of innovation has a negative effect on the debt cost which shows that more innovative company has a lower cost of debt. It also implies that a firm’s innovation activities could be recognized positively by creditors. These findings are also robust when we use a two-stage least squares regression model, pooled OLS regression model, and random effects model. Our results are consistent with Hsu, Lee, Liu, and Zhang(2015) which investigates the effect of innovation on the cost of capital using the United States data. Second, in high-tech industry, the acquiring patent rights is one of the key factors for surviving. Thus, we split the sample into high and non-high-tech industry groups. The results show that the coefficient of innovation is significant in the high-tech industry, but not in the non-high-tech industry. These findings imply that bond investors may think that the innovation is more important for high-tech firms than non-high-tech firms. Third, in high-tech industry, the coefficient of pay equality is positive and the coefficient of interaction term between innovation and pay equality is significantly negative. The pay equality variable takes the value of one if manager-employee pay gap ratio is equal or less than the median, and zero otherwise. In summary, this study finds that the firm’s innovation has a positive effect on the cost of debt capital and this relation is significant when the firms belong to high-tech industry, not in non-high tech industry. We also find that, in high-tech industry, the pay equality of manager-employee may increase the cost of debt capital but a firm’s innovation activities can reduce the negative effects of pay equality. These findings provide useful information and make contributions not only for high-tech firms’ managers but also for innovation policy makers.

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During the economic downturn, the demand for safe haven properties increases, which is known as the flight-to-quality phenomenon. Thereafter, the global financial crisis increase demand for safe assets. Interest in safe haven property and flight-to-quality phenomenon has increased not only in practice but also in academic circles. Baur & Luecy(2010) defined a safe haven property as an asset that has a negative correlation or little correlation with other risky assets when the market is unstable. This study analyzed whether the gold market can function as a safe haven property to the Korean stock market, focusing on KRX gold market data. Gold traditionally has the nature of a safe asset because of its physical scarcity and the historical facts that itself served as currency. Studies investigating the gold market and stock market after the financial crisis confirm that the gold market serves as a sure safe haven for advanced countries especially with key currencies. Baur and Lucy (2010) showed that gold serves as a safe haven for the stock markets of the United States and major European countries, and studies such as Ciner et al. (2013), Baur and McDermott (2010), and Liu (2010) also show that gold serves as a safe haven in developed countries. However, several studies investigate whether gold plays a role as a safe asset in emerging markets, while no consistent consensus has yet been achieved. Emerging markets are well known to have different characteristics from advanced countries during the financial crisis while emerging central banks and others increase the weight of gold to hedge the depreciation of the U.S. dollar during the financial crisis, and demand for gold will be different from advanced countries. For this reason, the results of gold serving as a safe haven for the stock market in emerging markets vary depending on the sample period. Many studies on the gold market in emerging markets, including Korea, does not directly use the domestic gold market, so there is a time difference when using daily data. As a result, they do not reflect properly the price information of gold. For this reason, it is necessary to study using domestic gold market data. The KRX gold market which is corresponding to the Koran stock markets in opening time and has relatively low investment costs. We analyze the correlation between KOSPI and the safe haven assets and compare the performance of the portfolios including KOSPI and the safe haven assets. We also include analyzing the dollar and bonds, which is a traditional risk-free asset. We employ daily returns of gold prices in the KRX Gold Market from March 24, 2014, which is the opening day of the KRX Gold Market, to April 29, 2020. We also use daily returns of the bond ETF, which underlying asset is the 3-year Korean Treasury-Bond, and use daily returns of KRW-USD exchange rate during the same sample period to the KRX Gold Market. As a result of empirical analysis gold and USD shows a significant negative correlation with the Korean stock market, respectively, which implies both gold and USD paly role of a safe asset against the Korean stock market. In particular, the KRX gold market shows high returns during the periods when stock markets fell down. Furthermore, we analyzed the effects of the properties of safe assets such as gold and the US dollar on portfolio performance, through the historical standard deviation and the Sharpe ratio index of the minimum variance portfolio and the equal-weighted portfolio. In terms of portfolio performance, gold plays a similar role as a traditional safe asset such as Treasury bonds improving performance by recouping the decline in stock returns within the stock price down turns. Gold price increases could further enhance portfolio performance than Treasury bonds. Whereas the KRX gold market, unlike treasury bonds, is not stable in correlation with KOSPI. When constructing the equal-weighted portfolio, performance is better on the basis of excess returns and Sharpe ratio indices rather than constructing minimum variance portfolios that change the proportion of gold. Furthermore, we analyze the dynamics among gold, stock, and USD employing an analysis of the vector autoregression (VAR) model, and find that there is a significant negative (-) response between gold and the Korean stock market. However, there was no significant negative reaction between the U.S. dollar and the Korean stock market. In conclusion, the empirical analysis of the stock market, including gold, shows that the gold market serves as a safe haven for Korean stock investors and that it can increase performance when incorporated in the investing portfolio. Characteristics of gold as a safe asset is also expected to provide new insights to stock investors. In general, safe assets are only known to hedge risk, but it would be helpful research in practice and academia to improve returns if they were operated with risky assets.

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The uncertainty surrounding the continuing availability of LIBOR after 2022 requires financial authorities and financial institutions in major countries to be thoroughly prepared. In this regard, financial authorities in major countries such as the U.S., the U.K., and Japan have recently completed the development of a new risk-free rate (RFR) to replace the existing IBOR and have been listing the RFR derivatives. The working group of Korea, which has been relatively late in developing a RFR, has also selected the overnight repo rate of government bonds and monetary stabilization bonds as the RFR in March 2021 after a series of discussions and votes, and announced that the development of detailed calculation method will be finalized in the third quarter of 2021. The repo market’s sufficient liquidity and use in derivatives markets were the main reasons for this selection. However, for the newly selected RFR to be settled in the market, a sufficient liquidity is required for related financial instruments or contracts, including RFR futures. Based on this circumstance, this study attempts to present policy implications for listing RFR futures in Korea Exchange by grasping the current status and structure of RFR futures listed in major countries. More specifically, we propose a plan to vitalize the domestic RFR futures market by presenting examples of major countries in which RFR futures are actively traded. In particular, the U.S.‘s Secured Overnight Financing Rate (SOFR) futures and the U.K.’s Sterling Overnight Index Average (SONIA) futures have been cross-listed on CME in the U.S. and ICE in Europe, so that existing Eurodollar futures and Fed rate futures could be replaced by these products. These countries’s experiences can be helpful for us to list a similar RFR product. Of course, it is unclear whether the RFR futures for Korean Won, which is not used as an international currency, can be settled down in a short period of time. The major countries already had derivatives market for short-term interest rate such as IBOR before listing RFR futures. In addition, they have sufficient demand for hedging short-term interest rate risk. Considering this domestic situation in which short-term interest rate futures are absent after the delisting of CD rate futures, the vitalizations of domestic RFR futures is difficult unless there is sufficient and institutional supports. The governments, government-related agencies and exchanges of major countries also have helped and supported RFR futures in order to improve their reliability and liquidity when they were first listed in exchanges. In the paper, we suggest the following methods to list and activate the RFR futures transaction. First, we propose diversification and centralization of RFR products that can satisfy the needs of market participants. For example, we can consider listing the Monetary Policy Board (MPB) RFR futures or spread trades between RFR futures and mid-term government bond futures. The introduction of spread trading with 3-year Treasury bond futures, which currently has sufficient liquidity, can induce existing market participants into the RFR futures market. In addition, it is necessary to design an appropriate incentive system for market makers by referring to overseas markets and past domestic cases with successful results.

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Asian markets provide ideal experimental sample for IPO research. Market development and regulatory changes give academic researchers the chance to gain detail insights on IPO topics. The main objective of this paper is to survey the literature on Asian IPOs. We use Web of Science as a data source to collect related literature. We survey papers using Asian IPO samples to study classical IPO topics and discuss special IPO topics in Asian IPO markets. Finally, we provide suggestions for future research on this subject.

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This study investigates whether institutional investors with large ownership (institutional blockholders) have informational advantages over other investors. The sample of this study is constructed from institutional investors’ mandatory filings on block shareholding of greater than 5% of a firm’s shares. Institutional blockholders are classified into active institutions if they express an intention to engage in a firm’s management as their purpose of investment and into passive institutions otherwise. To verify the information content of block ownership, this study investigates the short- and long-term market reaction to announcements of institutional investors’ block ownership. Main findings are summarized as follows. First, significant cumulative abnormal returns (CARs) are observed around the announcements. The CARs are much higher for active institutions than passive institutions. Second, the stocks owned by passive asset management companies significantly outperform both the market and the benchmark portfolio in the long-term. In contrast, the stocks owned by active private investment companies significantly underperform the benchmark portfolio. Overall, the results of this study suggest that passive asset management companies have superior skills in selecting undervalued stocks and they use long-lived information when they make large investment. In contrast, the inconsistent results on short- and long-term performance of stocks owned by active private investment companies imply that private investment companies’ activism are not effective enough to meet the initial expectations of the market.

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In this study, I examine the effect of patent applications on the cost of debt. Using a sample of Korean listed firms, I show that debtholders charge a significantly lower cost of debt to a firm with higher patent counts or greater patent productivity. This finding remains robust while considering the differences of firms with patents versus without patents, controlling for unobservable firm-specific factors by employing a firm-fixed effect model, and using a dynamic panel data model to mitigate an endogeneity concern that debt financing affects patenting activity. I further explore three possible channels through which patent applications affect the cost of debt. First, patents mitigate the degree of information asymmetry between firms and potential debtholders. Second, they provide expectations for increased future cash flows. Third, patents enable improved redeployability of assets. This study sheds lights on the real effects of patent applications on firms’ costs of debt.

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IPO underpricing is a subject of great interest for researchers. Previous studies have focused on the underpricing of private venture capital-backed IPOs, but mainstream academic researchers have left underpricing in government-backed IPOs largely uninvestigated. In this study, we fill this gap by analyzing the behavior of IPO underpricing for government-backed IPOs in Korea. For the purpose of this study, we examine 468 IPO cases on the KOSDAQ market during the period between 2009 and 2019. Empirical evidence shows that a unique structure of government sponsorship effectively reduces the level of underpricing in the IPO market. In particular, the dual sponsorship of government hybrid funding and private venture capital contributes most significantly to reducing the underpricing in the IPO market.

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This study examines how block share acquisitions of foreign investors affect stock returns of domestic target firms in Korea, focusing on the information asymmetry between target firms and foreign acquirers and the shareholder right protection in foreign acquirers’ home countries. There are at least two important reasons that using Korean data of block share acquisitions by foreign investors benefits the literature. First, Korean firms are well known to have poor governance systems and it is thus questionable whether foreign investors can improve firm value by monitoring as an outside blockholder when the investor protection is relatively low and whether geographic and cultural proximity of foreign investors can reduce information asymmetry with relatively low firm transparency in Korea. Second, investors are legally required to disclose their block holding intentions in Korea, which helps identify the effects of monitoring by blockholders on firms’ stock returns. Using 164 block share acquisitions in which foreign investors acquire at least 5% but less than 50% of a target firm’s stock shares from 1996 to 2016 as a sample, we find that stock returns of targets significantly increase when these block acquisitions are announced. To measure the information asymmetry foreign investors face in Korea, we use both geographic and cultural distances between foreign investors’ home countries and Korea and show that the positive stock market reactions to block acquisitions by foreign investors are more pronounced when the foreign block acquirers are geographically or culturally proximate to the host country. Moreover, we show that the value-increasing effects of geographic and cultural proximity of foreign investors on target stock returns are more evident when the foreign acquirers disclose their intentions to intervene in the management of target firms, suggesting that anticipated monitoring by foreign blockholders is an important determinant of the observed market reactions to their block share acquisitions. We also investigate how the extent of shareholder right protection in the home country of foreign acquirers influences the announcement returns of block acquisitions, using as a measure the difference in the shareholder rights scores between foreign acquirers’ home countries and Korea. We find positive stock price reactions to block acquisitions by foreign investors from countries with strong shareholder rights when they announce their monitoring incentives by stock market disclosures. In addition, we investigate whether the above findings vary according to the firm-specific information asymmetry measures such as a target firm’s size, age, tangibility, and R&D intensity, whether a target is listed in the KOSDAQ market, and whether it has credit ratings and the firm-specific governance measures such as its free cash flow and board size. We show that the value-enhancing effects of block acquisitions by foreign acquirers from geographically and culturally proximate countries and countries with strong shareholder rights are particularly evident when the firms targeted by foreign acquirers are likely to have higher information asymmetry and poorer governance systems according to the above-listed measures. Our results suggest that the stock market favorably responds to block share acquisitions by foreign investors anticipating their effective roles of monitoring target firms and firm value improvement facilitated by the active monitoring. Our results also indicate that these value increases by expected monitoring by foreign acquirers are more evident when the concerns on the information asymmetry between investors and targets are lower, when foreign acquirers are likely to have higher standards for the rights of shareholders, and when active monitoring is more likely to improve corporate governance and firm value. Our study contributes to the related literature in the following ways. First, our research confirms that considering heterogeneity among foreign investors is important in examining the impact of foreign investors on firms in the host country. We show that the heterogeneity in information accessibility of foreign investors due to their geographic and cultural proximities and in the shareholder rights protection in their home country matters in market valuation of their monitoring, in addition to the heterogeneity in shareholder activism in their home country (Kim, Sung, and Wei, 2017). Second, we supplement prior studies that investigate how information asymmetry between the host country and the home country of foreign investors and shareholder rights in their home country affect their governance activities and firm value (Kang and Kim, 2010), by exploiting the system of block holding disclosures in Korea and firm-specific measures of information asymmetry and corporate governance. Specifically, our findings suggest that the stock value increase in block acquisitions by foreign investors is attributable to the monitoring intentions of foreign investors with effective information accessibility and strong governance incentives, especially in firms with higher information asymmetry and poorer governance.

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The new coronavirus(COVID-19) has shocked economies around the world, and the stock market is also facing unprecedented conditions due to the effects of COVID-19. The impact of COVID-19 on the global economy is clearly different from typical cyclical fluctuations in the traditional economic development process and economic losses from the COVID-19 pandemic will also surpass the extent of endogenous and extreme events that have occurred in the past. Assessing and understanding the economic impact of COVID-19 has become an important issue. China is the first country to respond to COVID-19, and has made great efforts to boost shrinking production and consumption. However, since the level of the virus affects different industries, it is necessary to analyze the movement of the stock market at the industrial level. The Chinese stock market was a closed market where foreigners were not allowed to invest, but it has grown rapidly as an investment destination that investors around the world pay attention to following the government's stance of opening and reforming the capital market. The leading stock indexes, the Shanghai Composite Index and the Shenzhen Component Index, represent the entire flow of the Chinese stock market, with trading centered on large-cap stocks centered on traditional industries in the Shanghai market and new industry-oriented stocks such as IT and bio in the Shenzhen market. This paper tries to estimate the dynamic linear latent factor model (DLLFM) with jump in order to find jump risk, heteroscedasticity and time varying correlations in Shenzhen Stock Markets. In addition, the impact of disaster risk on volatility by industry was also analyzed by including the occurrence and diffusion of COVID-19 in the sample period. The motivation for the study began with the view that the economic crisis caused by shot down in China, where COVID-19 first occurred, could be quantitatively assessed from an industry-specific perspective on how it spreaded to the stock market. In particular, this study has utilized DLLFM because that model can measure the coefficients of time varying correlations among those various industries of Shenzhen Stock Market. Using six major Industrial Stock Index such as Manufacturing, IT, Finance, Transportation, Whole sale & Retail, Construction from 1/5/2015 to 8/31/2020, this study finds the evidence of common factor and time-varying correlations in addition to the industry-specific idiosyncratic risk. According to the main estimated results of this paper, jump risk of common factor comes every 7.82 trading days in Shenzhen stock markets and about 87 percent of the common factor of the Shenzen stock markets can be explained by Shanghai market risk, which is China stock market risk. Also, some part of unobserved common factor of the Shenzen stock markets may be explained by foreign exchange market risk of China. And the portion of foreign exchange market risk may be increasing as the Chinese government announces the new method of calculating standard value of yuan exchange rate in August 2015. So far as concerning the time varying correlations among those indices, the levels of correlations seem to be comparatively high, but those levels are going down transiently after the occurrence of COVID-19. In this study, we are trying to investigate the Shenzen stock markets where president Xi Jinping has visited couple of times as the center for bio, information, communication, venture markets for the future of Chinese economy to cope with US-China trade dispute. We have been very much interested in finding the real nature of the latent common factor of the Shenzen stock markets. Conclusively, the findings are, some of them Chinese systemic risk, some of them foreign exchange risk. All of these suggest that the use of multivariate models such as dynamic linear latent model seems to be essential to comprehensively analyze those industry-specific indices in the course of the transition of disaster risks such as COVID-19. Also unobserved common jump and heteroscedasticity seem to be those main characteristics of chinese financial time series. According to the main results of this paper, two pillars of the Chinese stock markets, Shanghai and Shenzhen, may look quite similar, but seem to be different from the view point of the portfolio or index investments. Somehow it would be better that investors should pay attention to those characteristics of the latent common factor of the Shenzen stock markets when it comes to the risk management strategies. It seems that the similarity of two stock markets from the stand point of the nature of risk, mainly comes from the financial regulations of Chinese government.

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