Hyeyoen Kim

Which trader's order-splitting strategy is effective? The case of an index options market

This study extends the recent study by Chae and Lee (2011) who empirically examine order-splitting and stealth-trading behaviours in the Korea Stock Price Index 200 (KOSPI200) options market, which is the single most liquid derivative market in the world. By analysing the high-quality data set, which identifies and describes all investors in the options market, we find that split orders submitted by institutional investors are substantially informative, whereas those of domestic individuals negatively contribute to the price discovery process. The inferiority of the order-splitting strategies of these individuals is more prominent when they trade deep Out-of-The-Money (OTM) options.

Foreign investor trading and information asymmetry: evidence from a leading emerging market

ABSTRACT This article examines the influence of foreign investor trading on information asymmetry in the Korean stock market, a representative emerging market characterized by a high level of information asymmetry between corporate insiders and outsiders, and among investors. We find a significantly positive relationship between foreign investor trading and the consequent bid–ask spread – the latter of which is considered as a proxy for the degree of information asymmetry – on both daily and weekly bases. Our results indicate that active foreign investor trading tends to exacerbate informational variation.

Investor sentiment, trading behavior and stock returns

ABSTRACT This article examines how investor sentiment and trading behaviour affect asset returns. By analysing the unique stock trading dataset of the Korean market, we find that high investor sentiment induces higher stock market returns. We also find that institutional (individual) trades are positively (negatively) associated with stock returns, suggesting the information superiority (inferiority) of institutional (individual) investors. Investor sentiment generally plays a more important role in explaining stock market returns than investor trading behaviour.

Large Datasets, Factor‐Augmented and Factor‐Only Vector Autoregressive Models, and the Economic Consequences of Mrs Thatcher

We investigate methods of capturing the salient characteristics of very large datasets in an investigation of UK and US macroeconomic policy, using factor-augmented VAR (FAVAR) models. We also estimate structural factor-only VAR (FOVAR) models and examine the impact of aggregate demand and aggregate supply. In a further empirical application, we find that while there is some evidence of increased macroeconomic flexibility in the USA as well as the UK since the late 1980s, the speed of macroeconomic adjustment is more marked in the UK economy post-1987, possibly reflecting the UK labour market reforms of the Thatcher government in the 1980s.

Weather and stock market volatility: the case of a leading emerging market

This study examines how weather affects the stock market volatilities of a leading emerging market. By analysing both historical and model-free implied volatilities, we find that the historical volatility better captures the weather effect than the implied volatility. We also find that volatilities tend to increase in cloudy, wet and windless weather, and that investors asymmetrically react to extremely high weather conditions in comparison with extremely low weather conditions.

Testing the relative purchasing power parity hypothesis: the case of Korea

ABSTRACT This study examines the relative purchasing power parity (PPP) hypothesis using the data from the Korean won–US dollar and the Korean won–Japanese yen foreign exchange markets. We extract proxies for inflation from stock market returns of Korea, the United States and Japan based on the method used by Chowdhry, Roll and Xia in 2005. We explicitly test the relative PPP hypothesis in light of the short-run price volatility using monthly, bimonthly and quarterly data from 1 January 1998 to 31 December 2012. Our findings suggest that the empirical test results from the entire sample period do not support the relative PPP hypothesis. However, the results from the sample period excluding the Asian Financial Crisis period show that the relative PPP hypothesis holds for the Korean won–US dollar market with a moderate magnitude of inflation impact, but not for the Korean won–Japanese yen market. Abrupt changes in exchange rates during the crisis period may have affected the relationship between inflation and exchange rates. This result also suggests that factors other than inflation might have affected the Korean won–Japanese yen exchange rate.

Forecasting Exchange Rate from Combination Taylor Rule Fundamental

This study examines the forecasting performance of the Taylor rule on the exchange rate when there is uncertainty in the structural breaks in a small open economy. Using the combination window method, which considers the uncertainty of the size of the estimation window, we find that the out-of-sample forecasting performance of our approach is better than that of other benchmark models in the U.S. dollar-Korean won exchange rate. This finding indicates that the expected exchange rate is influenced by the capital mobility between small and large open economies, which is driven by the dynamic interactions of monetary policies between the two countries, and that the forecasting outcome is sensitive to the estimation window size and to whether or not the window reflects changes in the policy regime.

Real Variables, Nonlinearity, and European Real Exchange Rates

In this paper we carry out an analysis of European real exchange rate behavior before and after the implementation of Economic and Monetary Union (EMU), that is, the single European currency, in January 1999. In particular, we model real exchange rates for a number of EMU and non-EMU countries against Germany in an explicitly nonlinear framework and allowing for variation in the equilibrium level of the long-run equilibrium real exchange rate using either relative productivities or real diffusion indices. The relative productivity specification derives from the well-known Harrod-Balassa-Samuelson effect (Harrod 1933; Balassa 1964; Samuelson 1964). According to the Harrod-Balassa-Samuelson effect, countries with rapidly expanding economies should tend to have rapidly appreciating real exchange rates. However, while the Harrod-Balassa-Samuelson effect focuses on a few series in order to explain the equilibrium level of the real exchange rate, the long-run equilibrium real exchange rate may be affected by a wider range of real variables in the macroeconomy. Including the wide range of available real variables in an econometric specification, however, raises a number of practical problems for a modeler, notably the lack of degrees of freedomaswell as potentialmulticollinearity. One way of circumventing this approach is to construct diffusion indices or factors that capture the core variability in a set of macroeconomic time series in a parsimonious fashion (Stock andWatson 1998, 2002a, 2002b; Bernanke and Boivin 2003; Bernanke, Boivin, and Eliasz 2005). In this paper we explore both approaches. The remainderof thepaper is organized as follows. In Section IIwe examine the underlying rationale for nonlinear real exchange rate adjustment, and in Sections III and IVwe briefly discuss theHarrod-Balassa-Samuelson

ELW pricing kernel and empirical risk aversion

This study examines the pricing kernel and empirical risk aversion implied by Korea’s equity-linked warrants (ELWs). The estimated pricing kernel is clearly time-varying and exhibits a monotonic decrease with the underlying return state, which is consistent with mainstream economic theories on marginal utility. The movement of empirical risk aversion captures the economic conditions reflecting the recent global and liquidity crises. Particularly, empirical risk aversion has a highly significant relationship with the overall stock market return and credit spread change.

The impact of monetary policy on banking and finance stock prices in China

In this study, we examine the impacts of changes to the required reserve ratio (RRR) on banking and finance stock prices in China from 2007 to 2012 using multiple variance ratio tests and vector error correction models. The efficient market hypothesis is rejected during the earlier increases in required reserve ratio (2007–2008) in the Shanghai A-market, and A-share prices negatively respond to increases in RRR. In contrast, both Shanghai A- and Hong Kong H-markets are efficient, and negative effects of RRR are not clearly observed during periods of stable RRR (2009–2010) and during a recent increase in RRR (2010–2012).