Jaeuk Khil

Are common stocks a good hedge against inflation? Evidence from the Pacific-rim countries

Abstract We explore whether the observed real stock return–inflation relations in the U.S. and 10 Pacific-rim countries for the sample period of 1970–1997 can be explained by the interaction between real and monetary disturbances. Ten countries exhibit a negative relation between real stock returns and inflation. Malaysia is the only country that exhibits a positive relation. For nine countries, real output disturbances drive a negative stock return–inflation relation, while monetary disturbances yield a positive relation. In addition, real shock components appear to be relatively more important than monetary shock components for these countries, and as a result the observed relation between stock returns and inflation is negative. Neither the tax hypothesis nor the monetary regime hypothesis seems to be easily compatible with the diverse experiences of the Pacific-rim countries.

A Time-Series Model of Stock Returns with a Positive Short-Term Correlation and a Negative Long-Term Correlation

We study portfolio stock return behavior that exhibits both a positive autocorrelation over short horizons and a negative autocorrelation over long horizons. These autocorrelations are more significant in small size portfolios. Among various forms of temporary components in stock prices, an AR(2) component is the simplest model compatible with this pattern of returns, which yields an ARMA(2,2) model of stock returns. We show that the significance of this model is that it requires the presence of feedback trading, which is a form of irrational trades, and the markets slow adjustment to the market fundamentals, which is consistent with recent modelings of stock prices. We find that the variation of the temporary component becomes greater as the firm size gets smaller. This implies that the deviation from the market fundamentals is larger in small size portfolios than in large size portfolios.

On the rationality of Korea's stock market: was the recent Korean financial crisis due to fundamental factors?

Abstract This paper examines whether the recent financial crisis in Korea was due to fundamental factors. To address this issue, we identify various components of Koreas stock market prices (KOSPI) and examine their responses to different types of shocks. Given the stationary behavior of KOSPI dividends, we relate stock price directly to earnings by deriving and using a log-linear model of the spread between price and earnings with a time-varying discount factor. Therefore, stock-price movements are explained by earnings (numerator component), time-varying discount factors (denominator component), and non-fundamental factors. Although we find evidence of substantial non-fundamental components in Koreas stock market prices, the sudden decline in Koreas stock market prices during the 1997 financial crisis was primarily due to fundamental components, in particular, the numerator component (e.g. earnings) combined with the denominator component (i.e. time-varying discount factor) rather than non-fundamental factors.

The More Transparent, the Better? Effects of Transparency Regime Changes on Large/Actively Traded Stocks on the Korea Exchange

This paper studies the effects of four events initiated by the Korea Exchange (KRX) aimed at enhancing pre-trade transparency: two for market opening by single-price call auction, and two for regular trading hours by continuous auction. We select the ten largest stocks, and another ten of the most actively traded, before and after each event. Market liquidity and depth were generally improved but not by a statistically significant margin. Investors adjusted their trading strategies as a smaller number of orders was canceled and it took less time for order cancellation. Our study shows that policies aimed at enhancing pre-trade transparency might have only a marginal impact on the trading of large and/or actively traded stocks.