IDEAS home Printed from https://ideas.repec.org/p/ris/adbewp/0427.html
   My bibliography  Save this paper

Price Discovery and Foreign Participation in the Republic of Korea’s Government Bond Cash and Futures Markets

Author

Listed:
  • Park, Cyn-Young

    () (Asian Development Bank)

  • Mercado, Rogelio

    () (Trinity College Dublin)

  • Choi, Jaehun

    () (Bank of Korea)

  • Lim, Hosung

    () (Bank of Korea)

Abstract

This paper examines the impact of foreign participation in Korean Treasury Bond (KTB) futures and its role in price discovery for KTBs, using daily transactions data from the over-the-counter market for KTBs and from the Korea Exchange for the futures. Our analysis suggests that foreign trading in the KTB futures market leads the price discovery process for the underlying bonds. Empirical results show that foreigners’ daily net long positions in the futures market exert significant influence in KTB and KTB futures prices. We also find that it is the unexpected component of foreign investors’ net long futures positions that explains a significant share of the pricing effects, suggesting that how foreign trading responds to news carries additional information content.

Suggested Citation

  • Park, Cyn-Young & Mercado, Rogelio & Choi, Jaehun & Lim, Hosung, 2015. "Price Discovery and Foreign Participation in the Republic of Korea’s Government Bond Cash and Futures Markets," ADB Economics Working Paper Series 427, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0427
    as

    Download full text from publisher

    File URL: http://www.adb.org/publications/price-discovery-and-foreign-participation-republic-korea-government-bond-cash-and-futures-market
    File Function: Full text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Erik Theissen, 2012. "Price discovery in spot and futures markets: a reconsideration," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 969-987, November.
    2. Minho Kim & Andrew C. Szakmary & Thomas V. Schwarz, 1999. "Trading costs and price discovery across stock index futures and cash markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(4), pages 475-498, June.
    3. Hautsch, Nikolaus & Hess, Dieter, 2007. "Bayesian Learning in Financial Markets: Testing for the Relevance of Information Precision in Price Discovery," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 189-208, March.
    4. Simpson, W. Gary & Ireland, Timothy C., 1985. "The Impact of Financial Futures on the Cash Market for Treasury Bills," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(03), pages 371-379, September.
    5. Alessandro Girardi & Claudio Impenna, 2013. "Price discovery in the Italian sovereign bonds market: the role of order flow," Temi di discussione (Economic working papers) 906, Bank of Italy, Economic Research and International Relations Area.
    6. Michael W. Brandt & Kenneth A. Kavajecz & Shane E. Underwood, 2007. "Price discovery in the treasury futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(11), pages 1021-1051, November.
    7. Bryan Campbell & Scott Hendry, 2007. "Price Discovery in Canadian and U.S. 10-Year Government Bond Markets," Staff Working Papers 07-43, Bank of Canada.
    8. Zhong, Maosen & Darrat, Ali F. & Otero, Rafael, 2004. "Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3037-3054, December.
    9. Burger, John D. & Warnock, Francis E., 2007. "Foreign participation in local currency bond markets," Review of Financial Economics, Elsevier, vol. 16(3), pages 291-304.
    10. James T. Witherspoon, 1993. "How price discovery by futures impacts the cash market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(5), pages 469-496, August.
    11. Christopher Chung & Bryan Campbell & Scott Hendry, 2007. "Price Discovery in Canadian Government Bond Futures and Spot Markets," Staff Working Papers 07-4, Bank of Canada.
    12. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 523-543, December.
    13. Mao‐Wei Hung & Hua Zhang, 1995. "Price movements and price discovery in the municipal bond index and the index futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(4), pages 489-506, June.
    14. Richards, Anthony, 2005. "Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 1-27, March.
    15. Shanaka J Peiris, 2010. "Foreign Participation in Emerging Markets’ Local Currency Bond Markets," IMF Working Papers 10/88, International Monetary Fund.
    16. Jeff Fleming & Barbara Ostdiek & Robert E. Whaley, 1996. "Trading costs and the relative rates of price discovery in stock, futures, and option markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(4), pages 353-387, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jakree Koosakul, 2016. "Daily Movements in the Thai Yield Curve: Fundamental and Non-Fundamental Drivers," PIER Discussion Papers 30., Puey Ungphakorn Institute for Economic Research, revised Jun 2016.

    More about this item

    Keywords

    price discovery; emerging market bonds; foreign participation;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:adbewp:0427. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Susan M. Torres). General contact details of provider: http://edirc.repec.org/data/eradbph.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.