Speculation Sentiment in Korea

Abstract

This study measures speculative sentiment in the Korean stock market using the primary market of leverage exchange-traded funds (ETFs.) In the ETFs’ primary market, observable arbitrage activity corrects the mispricing between ETF shares and underlying assets. This arbitrage activity in the leveraged ETFs proxies for the scale and direction of speculative demand shocks. I have constructed a Korean version of the speculative sentiment index using a sample of leveraged ETFs that track the KOSPI200 index. The index shows a negative correlation with contemporaneous market returns and negatively predicts returns after 3 months. Additionally, I introduce a novel speculation sentiment index that considers investor-specific trading data and verify that the above results are primarily driven by speculative demand shocks initiated by individual investors. Compared to a study conducted on the U.S. stock market, this result shows that the Korean stock market experiences a relatively slower process of price reversion to its fundamental value after speculative demand shocks.