Development, Present Status and Some Prospects of the Financial Markets in Korea

This paper describes the historical background and the present structure of Korea's financial markets to provide the basic understanding of issues facing the Korean financial system. The financial system in Korea has been introduced and developed to serve specific political or economic purposes, putting the financial markets in a tight control of government. As a result of the government-controlled financial policies market mechanism has oftentimes been ignored or distorted, making the Korean financial market inefficient and not competitive. To increase the efficiency of the financial system the Korean government plans to launch a Big Bang style financial reform. Attention is paid to the ongoing efforts of the Korean government for financial reforms. As the financial reform takes effect in the near future there will be far fewer regulations and government interventions in financial sector.     

Estimating the term structures of corporate debt

This paper investigates the corporate bond market by estimating monthly interest rate term structures for investment grade credit classes using both S&P's and Moody's ratings. Term structures are modeled by a piecewise constant forward rate curve and estimated on noncallable coupon paying bonds issued by industrial firms. The iterative estimation algorithm minimizes the sum of squared errors between market prices and model prices while identifying and removing outliers from the sample. Although the forward rate model is successful at pricing corporate debt, additional factors are found to be significant at explaining the residual price error that remains after the forward rate model is fit to market prices. Six necessary no-arbitrage conditions are derived for the term structures of risky and risk-free debt. Occasionally, some of these no-arbitrage conditions are violated and a few violations are asymptotically statistically significant. Finally, trading strategies that capture mispricing in the corporate debt market and violations of no-arbitrage bounds are discussed.This paper was adapted from my dissertation, completed at Cornell University. An earlier version of this paper was titled The Term Structures of Corporate Debt. Thanks to participants at the Cornell University finance workshop, Warren Bailey, Peter Carr, Antoine Giannetti, and especially Robert Jarrow for their helpful comments.     

The Role of Analysts’ Forecasts in Accounting-Based Valuation: A Critical Evaluation

This paper critically evaluates the use of analysts forecasts in accounting-based valuation. Specifically, I assess the usefulness and the limitation of analysts forecasts in predicting future earnings and in explaining the market-to-book ratio, in light of a comprehensive set of 22 explicit information items, including: economic rent proxies, conservative accounting proxies, earnings quality signals, transitory earnings proxies, industry characteristics, and risk and growth proxies. While analysts forecasts capture 45–83% of the information from these sources depending on model specifications, they do not appear to fully incorporate certain information items. In particular, proxies for conservative accounting and transitory earnings are incrementally useful in predicting future earnings; proxies for economic rents, conservative accounting, and risk are incrementally useful in explaining the market-to-book ratio. Collectively, these results validate the use of analysts forecasts as a parsimonious proxy for forward-looking information in accounting-based valuation and suggest how to improve on their use.JEL Classification: D4, G12, M4     

An analysis of “exactly distributed” test statistics for multivariate event tests

In this paper we derive a rule that identifies when exact tests may be used in the context of the multivariate regression model. Our derivation extends distribution theory reported in Rao (1973) and leads to the specification of exact tests for several event study hypothesis forms of interest to accounting and finance researchers. For tests where the event parameter is constrained to be equal across firms, we show that an infinite set of exact tests is available, of which the well known portfoliot-test is a special case. We conduct simulations using data from the CRSP Daily Returns file, and find that several test statistics, including exactly distributed statistics derived using the multivariate regression model, significantly over-reject the hypotheses examined.     

On the pricing of forward starting options in Heston’s model on stochastic volatility

We consider the problem of pricing European forward starting options in the presence of stochastic volatility. By performing a change of measure using the asset price at the time of strike determination as a numeraire, we derive a closed-form solution within Hestons stochastic volatility framework applying distribution properties of the volatility process. In this paper we develop a new and more suitable formula for pricing forward starting options. This formula allows to cover the smile effects observed in a Black-Scholes environment, in which the extreme exposure of forward starting options to volatility changes is ignored.Received: July 2004, Mathematics Subject Classification (2000): 91B28, 60G44, 60H30, 60E10JEL Classification: G13It is a pleasure to thank the anonymous referee for his valuable comments and suggestions on this paper. Furthermore, we would like to thank Holger Kraft, University of Kaiserslautern, and Alexander Giese, HypoVereinsbank AG Munich, for fruitful discussions and suggestions.     

Edokko Options: A New Framework of Barrier Options

In this paper, we will give a new framework of barrier options to generalize`Parisian Option' and `Delayed Barrier Option'. Take a stopping time asthe caution time. When occurs, derivatives are given `Caution'. After, if K.O. time =() occurs, derivative contractsvanish. We simply say that first `Caution' second `K.O.'. Using thisframework, designs of barrier options become more flexible than before and newrisk management will be possible. New barrier options in this category arecalled Edokko Options or Tokyo Options.     

Additional utility of insiders with imperfect dynamical information

In this paper we consider a market driven by a Wiener process where there is an insider and a regular trader. The insider has privileged information which has been deformed by an independent noise vanishing as the revelation time approaches. At this time, the information of every trader is the same. We obtain the semimartingale decomposition of the original Wiener process under dynamical enlargement of the filtration, and we prove that if the rate at which the additional noise in the insiders information vanishes is slow enough then there is no arbitrage and the additional utility of the insider is finite.Received: 1 October 2003, Mathematics Subject Classification: 60G48, 90A09, 60H07, 90A60JEL Classification: D82, G11, G14     

A Note on the Joint Distribution of α, β-Percentiles and Its Application to the Option Pricing

In this paper, using Laplace transform, we will calculate the joint density of twopercentiles of stock prices in the Black–Sholes model and make the price of exchange options of such twopercentiles.     

Pricing derivatives of American and game type in incomplete markets

In this paper the neutral valuation approach is applied to American and game options in incomplete markets. Neutral prices occur if investors are utility maximizers and if derivative supply and demand are balanced. Game contingent claims are derivative contracts that can be terminated by both counterparties at any time before expiration. They generalize American options where this right is limited to the buyer of the claim. It turns out that as in the complete case, the price process of American and game contingent claims corresponds to a Snell envelope or to the value of a Dynkin game, respectively.On the technical level, an important role is played by -sub- and -supermartingales. We characterize these processes in terms of semimartingale characteristics.Received: June 2003, Mathematics Subject Classification (2000):   91B24, 60G48, 91B16, 91A15, 60G40JEL Classification:   G13, D52, C73The authors want to thank PD Dr. Martin Beibel for the idea leading to the proof of Proposition A.4 and both anonymous referees for many valuable comments. The second author gratefully acknowledges financial support by the Deutsche Forschungsgemeinschaft through the Graduiertenkolleg Angewandte Algorithmische Mathematik at Munich University of Technology and by the Fonds zur Förderung der wissenschaftlichen Forschung at Vienna University of Technology.