Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

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Asian Review of Financial Research / May 2007 Vol. 20 No. 1

A Study on Determining the Spreads of Won-Denominated Credit Default Swaps

Mi Ae Kim;Jihyun Lee

Asian Review of Financial Research :: Vol.20 No.1 pp.1-33

Abstract
A Study on Determining the Spreads of Won-Denominated Credit Default Swaps ×

Determining the spread (or the premium) of CDS (Credit Default Swap)s properly is the first step for making the domestic credit derivatives market work. However, as far as we know, there is no literature dealing with won-denominated CDS. We suggest two methods for determining a won-denominated CDS spread and then we analyse the spreads obtained by each method. One method uses the market quotes of dollar-denominated CDS, whose reference entities are dollar-denominated bonds issued by domestic firms. The other method uses the credit spreads of won-denominated risky bonds. In addition, unobservable asset correlation is a critical factor in determining the spreads of basket default swap or a single CDS with counterparty default risk. Hence, we also suggest calculation methods for both implied correlation and historical correlation, and analyse the derived correlation results. Our results are remarkable. First, we can't find any evidence of a long-term equilibrium relationship and price-discovery phenomenon between won-denominated CDS spreads obtained by the two different methods. Second, won-denominated CDS spreads calculated by the first method are shown to be subject to the implied volatility of KOSPI200 options and KOSPI200 returns. However, the spreads calculated by the second method are shown to be subject to the treasury bond yields and the spreads between long-term bond yields and short-term bond yields. Third, the correlation implied by the dollar-denominated basket CDS is quite different from the historical correlation. In fact, the implied correlation is much higher than the historical correlation for basket CDS whose protection seller is a domestic financial institution and protection buyer is a foreign investment bank. Fourth, the historical correlation calculated by using CDS spread data is higher than that calculated by stock return data. The spreads of basket CDSs or a single CDS with counterparty default risk has a negative relationship with asset correlation. Therefore, the CDS spreads using stock returns correlation are higher than those using default swap spread correlation.

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An Empirical Study on the Pricing Model of Equity Linked Deposit

Bonil Ku;Youngho Eom;Hyunjun Ji

Asian Review of Financial Research :: Vol.20 No.1 pp.35-76

Abstract
An Empirical Study on the Pricing Model of Equity Linked Deposit ×

The market for Equity Linked Deposits (ELD) has been rapidly growing in Korea. Most ELDs can be decomposed into two components;straight bond and equity option. The latter is the more important part of the two because it primarily determines the characteristics of an ELD, which are quite different from those of a plain deposit product. The diversity of equity options in ELDs make it difficult for investors to evaluate the value of ELDs. This paper examines pricing models for ELDs based on data on ELDs issued from Mar. 2003 to Dec. 2005. The option features in ELDs covered in this study include exotic options like Barrier and Digital options as well as plain vanilla European options. We restrict our attention to products of which underlying assets are Korean equities or equity index. We calculate theoretical prices of ELDs in the primary market and compare them with issue prices to determine which pricing model is suitable for pricing ELDs. For the valuation of options embedded in ELDs, we use both historical and implied volatility estimates and assume stochastic or constant interest rates to see the influence of interest rate assumptions. Under each option pricing assumption, theoretical prices of ELDs are on average below issue prices. The interest rate assumptions have little effect on the price while the implied volatility model is better than the historical one in explaining issue price of ELDs. Also some factors driving the discrepancies between theoretic and issue price are identified. They include type of implicit derivatives, underlying asset, and so on.

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Determinants of Bank Mergers & Acquisitions in the U.S.

Hanjoon Kim

Asian Review of Financial Research :: Vol.20 No.1 pp.77-123

Abstract
Determinants of Bank Mergers & Acquisitions in the U.S. ×

The paper investigates financial characteristics of bank mergers and acquisitions (M&A) in the U.S. banking industry, employing the data for U.S. banks when M&A activities in the industry were booming in the late 1990s. It is interesting, but not surprising, to find several new attributes that relate to M&A, given the dynamically changing environment of the U.S. banking industry in the studied period, especially in the areas of technology and deregulation. This study found that acquiring banks were, overall, larger in their size and market-to-book value ratio than other groups of banks, i.e. the acquired and nonmerging banks. Acquired banks were generally less efficient in operation, compared with independent banks, and were, to a degree larger than chance would suggest, a type of bank holding company (BHC). Furthermore, the variables, size and (operating) efficiency, showed intertemporal stability between the two sample periods.

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Measuring the User Cost of Owner-Occupied Housing for the True Cost of Living Index

Tong Hun Lee,Keun Jon Chung

Asian Review of Financial Research :: Vol.20 No.1 pp.125-141

Abstract
Measuring the User Cost of Owner-Occupied Housing for the True Cost of Living Index ×

Using a single intertemporal consumption allocation model, we derive the user cost of owner-occupied housing and show a unified, internally consistent approach to incorporate the user cost in the Diewert-superlative index numbers such as the Divisia price index, which may be called as the True Cost of Living Index (TCLI). Since the user cost contains the expected rate of capital gains, we formulate an adaptive- extrapolative expectation model to estimate and forecast the expected series quarter by quarter. In an application to Korea, our user-cost evaluated index numbers exhibit wider inflation rate fluctuations than the Consumer Price Index (CPI), reflecting monetary policy implemented under the auspices of the International Monetary Fund and the World Bank during the 1997 foreign exchange crisis. Therefore, for a country like Korea where house prices are subject to great inflation, it is more critical to make a concerted effort to compile the necessary data and to construct the TCLI, such as the Divisia price index, with our user cost concept rather than to simply rely on the fixed-weight CPI including an ad hoc measure of owner-occupied housing without theory.

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내재가치를 이용한 사건연구방법론의 개발에 관한 연구:기업합병의 장기효과 측정을 중심으로

Won Heum Lee

Asian Review of Financial Research :: Vol.20 No.1 pp.143-183

Abstract
내재가치를 이용한 사건연구방법론의 개발에 관한 연구:기업합병의 장기효과 측정을 중심으로 ×

We develop an event study methodology which can be referred to the value-based event study analysis (hereafter called as “VESA”). This study is fundamentally based on the seminal works of Miller and Modigliani (1958, 1961, 1963). It is noteworthy that the valuation models can be used to estimate the intrinsic value of the firm, and some financial events may have impacts on the firm value changes. So if we can find that the firms experienced with some financial events have changed the intrinsic values, it is natural to say that the financial events incur the changes. In VESA approach, the intrinsic firm values will be measured by the intrinsic Q values (hereafter called as “IQ”).The following empirical findings about the long-term effects of M&A events are based on the VESA approach.First, in post-M&A samples, we find that the IQ values are lowered in the short-run, but in the long-run the IQ values are turned around to increase.Second, in the comparison of pre-M&A and post-M&A samples, we find the changes in IQ values in the short-run are not statistically significant, but they are significant in the long-run.In sum, the short-term effects are in line with the existing M&As literature, of which are mostly based on the traditional returns-based event study approach. The findings of long-term effects are unique in this paper.

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내재가치를 이용한 사건연구방법론의 개발에 관한 연구:기업합병의 장기효과 측정을 중심으로 ×
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