Price Discovery and Foreign Participation in Korea's Government Bond Cash and Futures Markets

42 Pages Posted: 31 Mar 2015 Last revised: 11 Apr 2017

See all articles by Jaehun Choi

Jaehun Choi

The Bank of Korea

Hosung Lim

The Bank of Korea; Bank of Korea - Economic Research Institute

Rogelio Mercado

Asian Development Bank

Cyn-Young Park

Asian Development Bank

Date Written: March 17, 2015

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.

Keywords: price discovery, emerging market, government bond, foreign participation

JEL Classification: G10, G13, G14

Suggested Citation

Choi, Jaehun and Lim, Hosung and Mercado, Rogelio and Park, Cyn-Young, Price Discovery and Foreign Participation in Korea's Government Bond Cash and Futures Markets (March 17, 2015). Bank of Korea WP 2015-8, Available at SSRN: https://ssrn.com/abstract=2580691 or http://dx.doi.org/10.2139/ssrn.2580691

Jaehun Choi (Contact Author)

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Hosung Lim

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Rogelio Mercado

Asian Development Bank ( email )

6 ADB Avenue Mandaluyong City 1550
Metro Manila
Philippines

Cyn-Young Park

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines
(632) 632-5473 (Phone)

HOME PAGE: http://www.adb.org

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