Asian Review of Financial Research

pISSN: 1229-0351
eISSN: 2713-6531

Past Issues

Past Issues

Asian Review of Financial Research / May 2008 Vol. 21 No. 1

Equity Premium Puzzle in Korean Stock Market

Insu Kim;Chung-hun Hong

Asian Review of Financial Research :: Vol.21 No.1 pp.1-32

Abstract
Equity Premium Puzzle in Korean Stock Market ×

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.

Download PDF Export Citation
Equity Premium Puzzle in Korean Stock Market ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Investment Decisions by Firms with an Option to Wait to Invest in Capital Market Equilibrium under Asymmetric Information

Suk Heun Yoon;Rae Soo Park

Asian Review of Financial Research :: Vol.21 No.1 pp.33-64

Abstract
Investment Decisions by Firms with an Option to Wait to Invest in Capital Market Equilibrium under Asymmetric Information ×

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.

Download PDF Export Citation
Investment Decisions by Firms with an Option to Wait to Invest in Capital Market Equilibrium under Asymmetric Information ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

An Empirical Study on the Information Effect of Abnormal Order Imbalances

Jangkoo Kang;Hyoung-jin Park;Jae Yul Ahn

Asian Review of Financial Research :: Vol.21 No.1 pp.65-100

Abstract
An Empirical Study on the Information Effect of Abnormal Order Imbalances ×

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.

Download PDF Export Citation
An Empirical Study on the Information Effect of Abnormal Order Imbalances ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Value-at-Risk Analysis of the Long Memory Volatility Process:The Case of Individual Stock Returns

Sang Hoon Kang,Seong-Min Yoon

Asian Review of Financial Research :: Vol.21 No.1 pp.101-130

Abstract
Value-at-Risk Analysis of the Long Memory Volatility Process:The Case of Individual Stock Returns ×

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.

Download PDF Export Citation
Value-at-Risk Analysis of the Long Memory Volatility Process:The Case of Individual Stock Returns ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

Analyst Recommendations and Option Market Reactions

Woojin Kim

Asian Review of Financial Research :: Vol.21 No.1 pp.131-180

Abstract
Analyst Recommendations and Option Market Reactions ×

This paper examines the effect of analyst stock recommendations on equity option market activity in US over the 1996 to 2002 period. I find that the implied volatilities of recommended stocks gradually increase up to the recommendation revision date and stay at the increased level after the revision, especially following downgrades. This pattern, however, seems to reflect changes in the past realized volatilities more than ex post future realized volatilities, indicating that option market may be overreacting to recommendation revisions. A delta hedged trading strategy that shorts call options on recommendation revision date yields significant positive profits before transaction costs, supporting the overreaction hypothesis. Analysis of cumulative returns and abnormal trading volume prior to the revision further suggests that there is more information trading in option market than in stock market.

Download PDF Export Citation
Analyst Recommendations and Option Market Reactions ×
  • EndNote
  • RefWorks
  • Scholar's Aid
  • BibTeX

Export Citation Cancel

1
Export citation