Jangkoo Kang

An Empirical Investigation of the Lead-Lag Relations of Returns and Volatilities among the KOSPI200 Spot, Futures and Options Markets and their Explanations

This article empirically examines the lead-lag relations among the KOSPI200 spot market, the KOSPI200 futures market, and the KOSPI200 options market, and provides some explanations for the observed lead-lag relations. In general, the KOSPI200 futures and options markets lead the KOSPI200 spot market by up to 10 minutes in terms of returns and by 5 minutes in terms of volatilities, even after purging the infrequent trading effect as well as the bid-ask spread effect. The KOSPI200 options market leads and lags the KOSPI200 futures market by 5 minutes only in terms of returns. The observed lead-lag relations seem to be caused by the difference in transaction costs of the three markets.

Equity Fund Performance Persistence with Investment Style: Evidence from Korea

Using a comprehensive database on equity funds in Korea, we investigate the performance and performance persistence with investment style employing the Fama and French three-factor model and the Carhart four-factor model. The paper finds that most investment styles in Korea noticeably outperform the passive benchmarks. In addition, positive performance persistence is observed among funds investing in large-cap stocks and stocks of high past performance. Finally, outperformance and positive performance persistence of equity funds are still present in various ranking and postranking horizons. These empirical findings are in sharp contrast with results from earlier studies on markets in developed countries, such as the United States.

An Extended CreditRisk+ Framework for Portfolio Credit Risk Management

Independent sector assumption in the CreditRisk+ has been a major obstacle to implementing the model. Attempts to overcome this limitation have not gained much success. This paper proposes an extension of the original model which accommodates a wide range of sector covariance structures. Existing numerical algorithms designed for the original model can be reused with little modification. Case studies show that our model outperforms other CreditRisk+ variants which allow sector dependency.A simulation version of our model is also introduced, which in turn used to find an optimal portfolio allocation based on the work of Andersson et al. (2001). Simulation error is very small compared to the analytic counterpart and the optimization significantly reduces portfolio credit risk.

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract: We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.

State-Dependent Illiquidity Premium in the Korean Stock Market

ABSTRACT We study the relation between the illiquidity premium and economic states in the Korean stock market. We find that aggregate market liquidity improves following real economic expansions and expansive monetary states and worsens after economic recessions and restrictive monetary states. The improved liquidity in the expansion–expansive state generates a huge illiquidity premium, while an illiquidity premium does not exist in the recession–restrictive state. As a result, the observed illiquidity premium displays strong state-dependent variations. Our empirical results indicate that a significant unconditional illiquidity premium in the Korean stock market arises due to a substantial illiquidity premium in the expansion–expansive state.

The Dynamics of Trades and Quote Revisions Across Stock, Futures, and Option Markets

This paper examines the dynamics of returns and order imbalances across the KOSPI 200 cash, futures and option markets. The information effect is more dominant than the liquidity effect in these markets. In addition, returns have more predictability power for the future movements of prices than order imbalances. Information seems to be transmitted more strongly from derivative markets to their underlying asset markets than from the underlying asset markets to their derivative markets. Finally, domestic institutional investors prefer futures, domestic individual investors prefer options, and foreign investors prefer stocks relative to other investor groups when they have new information.

Efficient Value at Risk Estimation for Mortgage-Backed Securities

We develop an efficient Monte Carlo simulation-based methodology for value at risk (VaR) and sensitivity analysis of mortgage-backed securities (MBS) that employs an importance sampling technique developed for quadratic VaR models. Our approach, whose validity is derived from a fundamental result in perturbation analysis, is applicable to any analytic interest rate and prepayment model, and more generally to any path-dependent cashflows that admit analytic gradients. We compare the accuracy and computational performance of our VaR estimators with those obtained via finite-difference gradient approximation schemes.

Challenges and Opportunities in Emerging Financial Markets

This special issue contains five papers selected from the 2015 SSEM conference held in Seoul, Korea. The conference was jointly sponsored by the Graduate School of Finance at Korea Advanced Institute of Science and Technology (KAIST) and Korea Institute of Finance. Sixty-eight papers were submitted to the conference, and all the authors were invited to submit their papers to the EMFT submission system for consideration for this special issue. The five papers appearing in this issue are the finalists chosen after a revise-and-resubmit process. The papers selected for this issue present various topics regarding emerging financial markets: cross-border mergers and acquisitions in an emerging financial market, capital flows into and out of emerging financial markets, high frequency trading in an emerging financial market, savingsborrowing and portfolio decisions in an emerging financial market, and the relation between postbankruptcy performance and management retention are issues covered in this issue. Below, we will briefly summarize the articles in this special issue. Moeller et al. (2004) document that the effects of M&A announcements on shareholder wealth vary according to the size of acquiring firms: small acquiring firms have positive announcement returns, and large firms have negative announcement returns. Kim and Jung’s article in this issue, which analyzes 225 cross-border M&As in Korea, documents that the size effect puzzle documented by Moeller et al. (2004) also exists in cross-border M&As and that the size effect is amplified in crossborder M&As where the acquiring firms’ ROA is low. This shows that small firms with low ROA and so less growth options prefer cross-border M&As. Moreover, Kim and Jung find that the macroeconomic uncertainty of the target country affects negatively the acquirers’ cumulative abnormal returns and there exists a diversification discount in Korean firms’ cross-border M&As. There has been debate regarding which factors, i.e., global factors or local factors, are the main drivers of the movements in capital flows. Calvo, Leiderman, and Reinhart (1993, 1996) show that global push factors play a significant role in accounting for cash flows to emerging market economies during the 1990s. On the other hand, Ahmed and Zlate (2014) document that country-specific factors, such as the interest differential between advanced and emerging economies, may determine the movements of capital flows. In this issue, Pyun reinvestigates this matter by analyzing 60 emerging economies for the period from 1986–2012 using the simultaneous equation model. He divides capital flows into equity and debt flows to consider the heterogeneity of portfolio flows, and documents that global risk factors mainly influence net equity flows, while country-specific factors such as domestic credit and financial openness affect net debt flows. Pyun takes a closer look at the period after the global financial crisis, and finds the following things: First, the U.S. real interest has a significant effect on net equity flows. Second, the increase in domestic credit is closely related to net equity outflows from the emerging market economies, which shows that local pull factors may play an important role in determining the capital flow after the global financial crisis. Third, capital controls may moderate net debt cash flows, though the evidence is weak.

Which Traders Contribute Most to Price Discovery? Evidence from the KOSPI 200 Options Market

ABSTRACT We examine which group of investors—individuals, institutions, or foreigners—has more information about the true price process in the Korea Stock Price Index 200 (KOSPI 200) options market. Using the Hasbrouck (1995) information share and the Gonzalo and Granger (1995) common factor weight approach, we show that foreigners are the most informative about the efficient price process, and domestic institutional investors as well as individual investors have small contribution to price discovery. This result holds firmly, even after controlling for the effects of trading volume and the number of trades. Our empirical results suggest that foreigners are informed traders in the KOSPI 200 options market, consistent with the findings of Ahn, Kang, and Ryu (2008).

Determinants and market implications of differentiated dividends in Korea

Purpose - – The purpose of this paper is to explore unequal dividend payment policies called differentiated dividends (DDs) in Korea. The characteristics of firms are examined which allocate higher dividends to small shareholders than large shareholders within the same share class. Design/methodology/approach - – Logit analysis is used to compare firms that initiate DDs with those that pay conventional equal dividends. The abnormal market reaction to news of initiation of DDs is also examined. Findings - – Managers of firms facing cash insufficiency are more likely to initiate DDs. The DD scheme is used as a method to cater to high dividend demands in the market. The stock price reaction to the initiation of DDs is positive when the total dividend payments are increased, signifying that the market interprets it as good news. Practical implications - – Firms facing cash insufficiency can avoid an increase in the cost of capital by retaining extra cash from DDs rather than borrowing external funds. Additionally, managers can foster favorable market reactions by using DDs which helps firms in attracting new capital investments. Finally, regulatory bodies can consider encouraging managers to adopt unequal dividend schemes to allow higher dividend payments to small shareholders, especially in countries with weak legal protection for minority shareholders. Originality/value - – Similar unequal dividend policies exist in European countries but there is a lack of research conducted on those policies. The paper provides implications for the strategic use of unequal dividends to maximize firm value.