Abstract
This study examines how the US subprime mortgage crisis affects the behaviour of the Korean stock and futures market and how the futures traders react to the shocks related to the crisis. Analysing a unique and high-quality daily data set on the ABX subprime index of the United States, Korea's implied volatility index (VKOSPI), and the KOSPI200 index and futures, we find a significant linkage and contagion effect between the US subprime market and the Korean market during the crisis period. However, the explanatory power of the ABX index return dissipates during the period of the recovery (after 2010). Our analysis, based on unique information about the types of futures traders, indicates that foreign investors are quite sensitive to the subprime shocks, whereas domestic investors are not. Furthermore, the empirical findings indicate that domestic individual investors invest their money in the opposite direction of the ABX index's movement during the subprime crisis period.
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