Does Trading Volume Matter to Price Discovery?

Kang, Jangkoo,Kang, So Hyun,Webb, Robert I. 한국재무학회 2011 한국재무학회 학술대회 Vol.2011 No.05

In this paper, we investigate common factor weights for U.S. and Japanese gold and platinum futures markets to examine their contribution to price discovery. The Japanese commodity futures market differs from most other commodity futures markets in that the most actively traded contract months are the deferred months rather than the nearby contract month. In addition the size of Japanese platinum market is larger than the U.S. market, vice versa in gold futures markets. Therefore their comparison with other exchange contracts provides information for whether trading volume matters to information contributions across commodity futures markets. Our findings show that regardless of maturities, the U.S. COMEX futures market primarily contributes to price discovery on gold futures markets, whereas the Japanese TOCOM futures market does for platinum futures commodities. In addition, we separate the volume effect and maturity effect by comparing NYMEX and TOCOM futures contracts that have different volume patterns with respect to maturities. According to our results, the well-known volume effect is dominated by the maturity effect that informational efficiency is inversely proportional to maturities.

The predictive power of option-implied skewness : shorting costs and investor sentiment

Jangkoo Kang,Myounghwa Sim 한국재무학회 2014 한국재무학회 학술대회 Vol.2014 No.05

This paper examines the source of the predictive power of option-implied skewness (OIS) for future stock returns. Given that informed investors prefer to trade in the options market and it takes time for the information contained in the option prices to get incorporated into stock prices, OIS can predict future stock returns. We hypothesize that the predictive power of OIS stems from a delayed response of stock prices to information observable in the options market, and document evidence in support. In particular, we find that the relation between OIS and future stock returns is stronger among stocks that are more costly to shortsell. Higher shorting costs are presumed to deter stock prices from reflecting the information embedded in OIS, resulting in a stronger positive relation between OIS and stock returns. Moreover, we reveal that the predictive power of OIS is more prominent and persistent during high-sentiment periods. It also supports that stock mispricing is associated with the positive OIS-return relation, considering that high sentiment produces overpricing more so than low sentiment produces underpricing.

The Effects of a Transparency Change in the Preopening Session on Price discovery

Jangkoo Kang,Doowon Lee 한국재무학회 2007 한국재무학회 학술대회 Vol.2007 No.04

This paper examines how price discovery efficiency is affected by changes in the pre-trade transparency level on the Korea Exchange (KRX) on October 6, 2003. The preopening session on the KRX has experienced three policy changes related to pre-trade transparency of the open limit order book. We find that KRX stocks composing the KOSPI200 index have significant price learning about 10 minutes before the opening. We document that the transparency level change has reduced informed traders’ participation in the preopening, but has enhanced the information transfer efficiency for uninformed traders. The information loss from the decreased informed participation is canceled out by the increased information transfer efficiency for the uninformed. The total amount of market price discovery shows no significant difference after the transparency change. Overall, we conclude that the pre-trade transparency level change did not increase preopening informativeness of the intrinsic price.

The Role of High Frequency Traders in Electronic Limit Order Markets

Jangkoo Kang,Jeongwoo Shin 한국재무학회 2012 한국재무학회 학술대회 Vol.2012 No.05

This paper performs an in-depth analysis of identified high frequency traders in the KOPSI200 futures market. Although high frequency traders’ order submission distribution across order aggressiveness is quite similar to other algorithmic traders and ordinary traders, 94 percent of non-marketable limit orders by high frequency traders are revised or cancelled and 74 percent of participation in trades is through marketable orders. This paper documents that this highly impatient behavior is attributed to trading strategies that are based on extremely short-lived private information about future price movements, not passive market-making. Limit order revisions exhibit a tag-along effect; when the market moves away from (approaches) the original limit price, the revision price is set more (less) aggressively. Active use of fleeting orders by high frequency traders reduces the information content of the limit order book.

The Momentum Effect in the Korean Stock Market

Jangkoo Kang,Kyungyoon Kwon,Hyoung-jin Park 한국재무학회 2011 한국재무학회 학술대회 Vol.2011 No.11

We examine whether prices in the Korean stock market had momentum from 1990 to 2010. In the result of this study, there was no momentum in the Korean stock market for the 1990’s, which is consistent with the previous studies about the momentum effect in the Asian markets. However, in the 2000’s, we observe the significant momentum especially in large companies. The observed momentum in this study is hardly seen as a manifestation of the momentum effect in the developed markets because the momentum is usually more prominent in small-size firms. To ascertain what brings momentum in the Korean stock market, we examine if risk factors which generate momentum have been planted as the Korean market gets developed. Not only does the factor exposure hypothesis fail to explain the momentum, but also the business cycle risk factor in Chordia and Shivakumar does not explain the momentum in the Korean stock market. Next, we investigate if individualistic and overconfident trading behavior of foreign investors attributes to the momentum in the market. The empirical results in the study support the foreign investors’ trading behavior hypothesis.

Shorting costs and asymmetry in mispricing

Jangkoo Kang,Hyoung-Jin Park,Myounghwa Sim 한국재무학회 2013 한국재무학회 학술대회 Vol.2013 No.08

We hypothesize that overpricing shows up more often than underpricing if short-selling is costly relative to buying so that there is arbitrage asymmetry, and document the followings. First, put-optioned stocks, which are supposed to be less costly to short, have less anomaly profits than non-put-optioned stocks. Second, in highsentiment periods, short-legs of anomaly portfolios are more profitable with put-optioned stocks than non- putoptioned stocks, while, in low-sentiment periods, short-legs are not profitable with both subsamples of stocks. Third, returns on short-legs of anomaly portfolios are negatively related to lagged sentiment only when the degree of market-wide arbitrage asymmetry is high, where arbitrage asymmetry is measured by the difference of the market impact costs between the up market and the down market or by the market-wide average change in breadth. Finally, anomalies associated with capital investments do not seem to be caused by the presence of short-sale constraints.

The effect of foreign investors on market information efficiency in the Korean equity market

Jangkoo Kang,Kyung Yoon Kwon,Hyoung-jin Park 한국재무학회 2013 한국재무학회 학술대회 Vol.2013 No.11

This study examines whether foreign investors increase informational efficiency in the Korean stock market from January 1999 to June 2013. Bae, Ozoguz, Tan, and Wirjanto (2012) document that the beneficial effect of foreigners facilitating information reflection on stock prices in other Asian markets is not observed in the Korean market even though the Korean market has a large amount of US equity holding. We reinvestigate the role of foreign investors in the Korean equity market by defining foreign investors’ investibility as the normalized trading volume of foreign investors. We estimate how much faster the reflection of global or domestic information becomes when foreign investibility increases. In the results of our cross-sectional analysis, unlike Bae et al., foreigners’ trades are shown to increase the informational efficiency for both global and local market information. In particular, in export-import companies that are expected to be more sensitive to the global market, the improvement in informational efficiency is significant when foreign investiblity increases. Our results prove that foreign investors play a beneficial role in the Korean equity market facilitating information transmission.

The Momentum Effect in the Korean Stock Market

Jangkoo Kang,Kyungyoon Kwon,Hyoung-jin Park 한국재무학회 2011 한국재무학회 학술대회 Vol.2011 No.05

After Asian financial crisis in 1998, the regulation of stock trading against foreigners in Korea have been greatly released so that the foreigners' ownership of the whole Korean stock market in the late 2000s has increased around 40% from 10%. That change in investor constitution might have an effect on the dynamics of stock prices in the Korean market. Given the circumstance, this paper examines whether the momentum effect comes into being as a result of the increase of foreign investors' trading. In the results, the simple zero-cost portfolio with buying past six month winners and selling past six month losers does not show significant profit. However, we observe the significant momentum profit of the zero-cost portfolio composed of large firms. Since foreigners mainly invest in large firms in the Korean stock market, that momentum profit can be caused by foreigners. In the study, this presumption is supported by the analysis of price contribution on the zero-cost portfolio and the proportion of winners and losers in the portfolio classified by firm size and foreign ownership changes.

Performance of a Liquidity-augmented Capital Asset Pricing Model in the Korean Stock Market

Jangkoo Kang,Jeewon Jang 한국재무학회 2010 한국재무학회 학술대회 Vol.2010 No.11

Using the Korean stock market data over the period from 1986 to 2010, we find that stock liquidity can play an important role in explaining the cross-section of stock returns. To capture as many aspects of liquidity as possible, we take three different liquidity measures from previous literature. Regardless of liquidity measures, our results indicate strong evidence of a liquidity premium, which cannot be accounted for by the CAPM and the Fama-French three-factor model. Constructing a two-factor asset pricing model with the market and liquidity risk, we find that our liquidity factor appears to capture market liquidity conditions during our sample periods, and that the two-factor model can explain asset pricing anomalies such as the size premium and the value premium, as well as the liquidity premium, much better than the CAPM and the Fama-French three-factor model.

Short-Term Momentums in the Commodity Futures Market

Jangkoo Kang,Kyung Yoon Kwon,Jaesun Yun 한국재무학회 2017 한국재무학회 학술대회 Vol.2017 No.05

Unlike in equity markets, strong short-term momentum, instead of short-term reversal, is observed in commodity futures markets. Moreover, while long-term momentum in commodity futures markets is strongly correlated with momentum in the U.S. equity market, short-term momentum does not share any common momentum factor with the equity market. We set forth the hypothesis that liquidity provision of speculators may account for the short-term momentum in commodity futures markets, and provide the following empirical evidence for it. First, speculators are momentum traders while hedgers are contrarian in the short-run, both unwinding their positions after a few weeks. Second, liquidity supply factors predict short-term momentum returns, and the short-term momentum is stronger in nearby contracts than distant contracts.