Abstract
Since the introduction of ELS (Equity-linked securities) in 2003, the structured products have become one of the most important investment vehicles to Korean retail investors. However, the rapid growth of those structured products has induced the imbalance of Korean financial markets and may have eventually damaged the financial stability of Korean economy. In this paper, we investigate how Korean securities companies issuing the structured products hedge their positions and how their activities affect the financial stability. In addition, we conduct a simple empirical analysis to examine the relationship between the issue of ELS and the financial stability using FSI (financial stability index) provided by Bank of Korea. According to the results, the balance of ELS affects the financial stability negatively and this is significant even after adjusting for the control variables such as the KOSPI index, VKOSPI, the risk-free interest rate, and CPI. More specifically, the balance rather than the amount of monthly issuance is significant to financial stability. In addition, the decrease in underlying indices reduces the early redemption, thereby damaging the financial stability. Lastly, we suggest several solutions to alleviate the negative effects.
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