Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

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Asian Review of Financial Research / January 2007 Vol. 20 No. 3

Information Asymmetry and Added Value of Analyst Recommendations

Sang Koo Kang;Joonghyuk Kim;Chan-Woo Lim

Asian Review of Financial Research :: Vol.20 No.3 pp.1-34

Abstract
Information Asymmetry and Added Value of Analyst Recommendations ×

We examine if analysts can add value beyond what stock characteristics can provide in Korean market using their stock recommendations. The stock characteristics included in this study are price momentum, contrarian variables such as turnover ratio, earnings -to-price ratio and book-to-market ratio, and size. Given that these characteristics and their return predictabilities are already known to analysts, if analysts can provide added value, the investment strategy following their stock recommendations should generate higher returns than the investment strategies formed by stock characteristics do. In addition, we examine how the information asymmetry can affect the investment value analysts provide through their stock recommendations. We first show that three month buy-and-hold abnormal returns on zero investment portfolio using consensus recommendation and changes in consensus recommendation earn 12.89% and 9.61%, respectively, confirming the previous findings that analyst recommendations have investment value. Then we examine if analyst recommendations add value, using a model following Jegadeesh et al. (2004). The results show that the level of consensus recommendations does not add value, whereas, the changes in consensus recommendations do add value up to 2 month holding period. We also show that analysts can add more value when the information asymmetry is higher in the market. When the information asymmetry is high, the three month zero investment portfolio returns on the level and the changes in consensus recommendations are statistically significant 3.45% and 3.50% respectively. It indicates that the analysts' private information contributes more to the investment value added by analysts when the information asymmetry is high.

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Can Trading Volume Explain Persistence and Asymmetry of Return Volatility?

Sang Hoon Kang,Seong-Min Yoon

Asian Review of Financial Research :: Vol.20 No.3 pp.35-56

Abstract
Can Trading Volume Explain Persistence and Asymmetry of Return Volatility? ×

We investigated the relationship between return volatility and trading volume using 20 individual Korean stocks. Employing trading volume as a proxy for information arrival, the implications of volatility persistence and asymmetry were tested using the GARCH(1,1) and EGARCH(1,1) models. The empirical analysis shows that, although including trading volume in the GARCH and EGARCH models explains the persistence and asymmetry of conditional variances, the remaining ARCH effects are still present in the residuals of those models. These results do not support the implications of the volatility–volume relationship of the mixture of distribution hypothesis in the Korean stock market.

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Infroduction and Expiration Impacts of Equity Linked Warrant(ELW) on Underlying Assets

Junesuh Yi

Asian Review of Financial Research :: Vol.20 No.3 pp.57-96

Abstract
Infroduction and Expiration Impacts of Equity Linked Warrant(ELW) on Underlying Assets ×

Similar to the derivative warrant or covered warrant, the equity linked warrant (ELW) market has been rapidly growing since its first appearance on December 2005 in Korea. The Korean ELW market is now ranked fourth in the world with 1,300 listed ELWs and 300 billion dollars of daily dollar trading volume within one year upon debut. A rich variety of hybrid derivative linked securities (DLS) has been witnessed and the importance of DLS more stressed for the developed and increased capital market. One of the most interesting topics is to examine the effect of several types of DLS issuance or repurchase on its underling assets. Out of the various DLS, this paper investigates on the price, volume, and volatility effects of underlying stocks around the introduction and expiration date of ELW, very popular DLS in Korea. The study finds the delta hedge effect that the price and volume of underlying stocks increase on or prior to the date when the term and conditions of ELW issuance is determined, and the short-term signaling effect that the price and volume of underlying stocks increase a day after ELW introduction. With respect to the expiration of ELW, it is shown that the price of underlying stocks goes down before the expiration date and goes up after the date of out-of-the money ELW, and that the price of underlying stocks decreases a little bit around the expiration date for in-the-money ELW. In addition, the price of underlying stocks shows higher volatility during ELW list periods rather than before the introduction or after the expiration date. The results of this paper demonstrate somewhat different pictures, compared to those of the previous literatures. The reasons may be explained that the Korean ELW market has not been settled down yet. Therefore, the paper is short of perfection on the ELW trading system, which should be improved. The current system does not allow physical settlement on the expiration of ELW and bid-ask quota for a liquidity provider within 30 days before expiration date. Also, most issuers play a role of the liquidity provider and the time gap is only 2 or 3 days between the announcement and introduction dates. The paper makes some contribution in the sense that it is the first study of ELW in Korea. The paper reveals some imperfection through comparison of the results of this paper to those of the previous literatures. This will help the ELW market to completely settle down in Korea. The paper also could trigger the various studies with respect to ELW, for instance on the development of ELW price determination model or the factor analysis of price.

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Volatility Spread on KOSPI 200 Index Options and Risk Aversion

Suk Joon Byun;Sun-Joong Yoon;Byung Jin Kang

Asian Review of Financial Research :: Vol.20 No.3 pp.97-126

Abstract
Volatility Spread on KOSPI 200 Index Options and Risk Aversion ×

Based on the theorem 1 of Bakshi and Madan(2006) that the difference between the historical volatility and the risk-neutral volatility is determined by the risk aversion and the higher moments of return distribution, this paper investigates the risk aversion implied on KOSPI 200 index options. In addition, we explore relative importance between skewness and kurtosis by using the change of the parameter value estimated when imposing upon restrictions on higher moments. We find out that the risk aversion implied on KOSPI 200 option is smaller than that implied on S&P index options, and the kurtosis of return distribution is relatively more important than the skewness. The importance of kurtosis is consistent to the result of S&P options market. To test a reliability of the methodology used in Bakshi and Madan (2006), finally, we compare our results to the results using the methodology of Bliss and Panigirtzoglou (2004). The method of Bakshi and Madan (2006) gives the risk aversion similar to those of extant methodologies, albeit a small quantity of computational load.

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Conflicts of Interest Among Securities Firms Running Asset Management Businesses

Rae Soo Park;Bo Sung Shin

Asian Review of Financial Research :: Vol.20 No.3 pp.127-153

Abstract
Conflicts of Interest Among Securities Firms Running Asset Management Businesses ×

Many securities firms are running asset management businesses as well as underwriting businesses. However, when securities firms run these two businesses at the same time, a conflict of interest may arise between customers of underwriting business and those of asset management business. For example, securities firms want to favor customers of asset management businesses at the expense of those of the underwriting businesses because they can get more profit from the former business which is growing much faster than the latter one. We test for conflict of interest by comparing the underwritten prices of IPOs from 1999 through 2006 in Korea by securities firms both with and without asset management businesses. We find that IPOs are more deeply underpriced when they are underwritten by securities firms running asset management businesses. This shows that there may be conflicts of interest among them which favor customers of the asset management business by channeling deeply underpriced IPO stocks into their running funds. In addition, conflicts of interest turn out to be more conspicuous among securities firms having larger fund market shares or those that have begun with the asset management business first before running the underwriting business. Our results imply that the combination of underwriting and asset management businesses may cause conflicts of interest and the degree of conflicts of interest may vary in accordance with how deeply they are engaged in the asset management business.

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