The Efficiency of Price Discovery in the Korean Government Bond Markets (in Korean)

This paper examines the efficiency of price discovery and its determinants in the Korean government bond markets using intraday executed price and volume. The efficiency of price discovery is measured by the variance ratio proposed by Lo and Mackinlay (1988). And its relationship with market liquidity is investigated based on Kyle (1985)'s theoretical model. The main results are summarized as follows: First, the efficiency of price discovery in the market is very low, which is a finding consistent with a swap spread reversal phenomenon. Second, the major determinants of the efficiency in Korean government bond markets are the liquidity at the dimension of breath not the liquidity at the dimension of depth. More specifically, as an explanatory variable of the efficiency, price impact (Kyle's λ) is not statistically significant. Volume, however, has a positive and statistically significant correlation with the efficiency. This finding indicates that the policies that can reduce transaction costs and increase volume are needed to improve the efficiency in the markets. Finally, the seasonality of issuing bonds and paying back liabilities does not impact on the efficiency. The disappeared seasonality is attributed to the government policies that reduced uncertainty in issuance and redemption.