Korean Treasury Bond Futures Research Articles

Effect of Margin Requirement on Default Risk and Liquidity in the Korean Futures Market

Margin requirements are often viewed as an effective policy tool to prevent the default risk and maintain market stability. For the Korean futures market, this paper examines whether the margin requirements work normally as a tool to prevent default risk and margin changes have impact on futures trading activity. KOSPI200 stock index futures, USD (U.S. Dollar) futures, and 3-year KTB (Korean Treasury Bond) futures are included in the sample for the period from 2010 to 2015. Using the simulation method assuming the worst situation, we find that the possibility of default occurs once for KOSPI200 futures, twice for 3-year KTB futures, and 7 times for USD futures during the sample period. This result suggests that active margin requirement policy is necessary to prepare for financial market turbulence. In addition, we find that the margin changes do not have a significant impact on the futures trading activity, suggesting that decreases in margins are not effective means to improve liquidity in the Korean futures market

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

This paper examines the impact of foreign participation in Korean Treasury Bond (KTB) futures and its role in price discovery, using daily transactions data from the over‐the‐counter market 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. Our empirical results also suggest that information transmission between cash and futures markets has improved significantly in the crisis and post‐crisis period while local market participants have become better in extracting information content from market transactions. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:23–51, 2017

Modeling and Forecasting Realized Volatilities of Korean Financial Assets Featuring Long Memory and Asymmetry

AbstractLong memory, asymmetry, volatility spillover aspects of the realized volatilities (RVs) of the log returns of the Korean KOSPI, the Korean won/US dollar exchange rate, Korean treasury bond futures, and the US S&P 500 index are investigated in this paper. For all RVs, significant long memories and asymmetries are identified, which can improve forecasts if suitably used. A new long memory asymmetric threshold HAR‐RV (heteroskedastic autoregressive realized volatility) model is proposed. The new model shows explicit differences between the coefficients of daily, weekly, and monthly RVs for days of positive returns and those for days of negative returns. By analyzing the RVs, we find that pseudo out‐of‐sample forecast performance of the proposed model is better than a widely used existing asymmetric long memory model in about half of cases considered. The new model as well as another existing asymmetric model show that forecast improvements due to implied volatilities for the S&P 500 index decrease when asymmetries in RVs are accounted for. The two asymmetric models find significant decompositions of the spillover effects from the influential market S&P 500 index to the influenced market KOSPI (or from the KOSPI to the Korean won/US dollar exchange rate) into three oscillating components: substantial positive short‐term daily spillovers, moderate negative weekly spillovers, and somewhat positive long‐term monthly spillovers.

Price Discovery in the Korean Treasury Bond Futures Market

Price Discovery in the Korean Treasury Bond Futures Market

Dynamical mechanism of two-phase phenomena in financial markets

Two-phase behavior of the Korean treasury bond (KTB) futures in the Korean exchange market is investigated in this study. To show that the two-phase phenomena are due to heavy-tailed behavior of distribution of price returns, actual data from the KTB futures market with shuffled data and a generated time series are examined according to the Brownian process. In addition, we study the correlation inherent in the KTB futures and its Brownian walk, describing the extent to which the volatility clustering plays a crucial role in equilibrium and nonequilibrium states of financial markets. It is shown that the two-phase behavior essentially results from heavy-tailed behavior of the distribution of price returns. This two-phase behavior does not appear to be relevant to volatility clustering.

Volatilities, traded volumes, and the hypothesis of price increments in derivative securities

A detrended fluctuation analysis (DFA) is applied to the statistics of Korean treasury bond (KTB) futures from which the logarithmic increments, volatilities, and traded volumes are estimated over a specific time lag. In this study, the logarithmic increment of futures prices has no long-memory property, while the volatility and the traded volume exhibit the existence of the long-memory property. To analyze and calculate whether the volatility clustering is due to a inherent higher-order correlation not detected by with the direct application of the DFA to logarithmic increments of KTB futures, it is of importance to shuffle the original tick data of future prices and to generate a geometric Brownian random walk with the same mean and standard deviation. It was found from a comparison of the three tick data that the higher-order correlation inherent in logarithmic increments leads to volatility clustering. Particularly, the result of the DFA on volatilities and traded volumes can be supported by the hypothesis of price changes.

HURST EXPONENTS IN FUTURES EXCHANGE MARKETS

The dynamical behavior of the Korean treasury bond (KTB) futures is investigated using a modified rescaled range (R/S) analysis. Lo's modified R/S analysis as well as classical Hurst's R/S statistics are utilized in order to analyze tick data of KTB futures. The Hurst exponent can be estimated by both classical and modified R/S statistics. The results of this study show that a series of returns has larger long-term correlation as the time lag increases. The Hurst exponent that shows a memory effect for the tick data of KTB futures is larger than 0.5, while the Hurst exponent has a value of nearly 0.5 for the corresponding shuffled data.

Tests of alternate models for the pricing of Korean Treasury bond futures contracts

It is known that KTB futures contracts are significantly underpriced when the model price is calculated using the ad hoc cost-of-carry model employed in industry. This paper examines whether this underpricing phenomenon is caused by using the wrong model to price the futures contracts. This paper documents that the difference between the model price and the market price of KTB futures decreases substantially if the correct term–structure-based model is used to estimate the model price of KTB futures. In addition, even though the underpricing phenomenon can be exploited to generate some trading profits, the profits cannot be regarded as arbitrage profits. Thus, we believe that the underpricing phenomenon is illusory, and that much of it can be attributed to the wrong model being used in the industry.

Korean Treasury Bond Futures Pricing Model

This paper proposes two alternative methods which are used for pricing the theoretical value of the KTB futures on the non-traded underlying asset; first method is to use the CKLS model, under which the volatility of interest rate changes is highly sensitive to the level of the interest rate, and then employ binomial trees to compute the theoretical value of futures, second one is to use the multifactor Vasicek model considering correlations between yields-to-maturity and then employ the Monte Carlo simulation to compute it. In the empirical study on KTB303 and KTB306, an CKLS methodology is superior to the conventional KORFX method based on the cost-of-carry model in terms of the size of difference between market price and theoretical price. However, the phenomena, the price discrepancy using the KOFEX methodology is very small for all test perlod, implies that the KOFEX one is being used for the most market participants. The reasons that an multifactor Vasicek methodlogy is performed poorly in comparison to another methods are 1) the Vasicek model might be not a good model for explaining the level of interest rates, or 2) the important point considered by the most market participants may be on the volatility or interest rate, not on the correlations between yields-to-maturity.

Multifractal Measures for Bond Futures Prices in Futures Exchange Market

We study the tick dynamical behavior of the bond futures price using the rescaled range analysis (R/S analysis) in Korean futures exchange market. For our case, the multifractal Hurst exponents with long-run memory effects can be obtained from two kinds of Korean treasury bond futures transacted recently. It exists no crossover for the Hurst exponents at charateristic time scales. Particularly, we find that our result for probability distribution of prices is similar to a Lorentz distribution different from fat-tailed properties of bond futures price.

Pricing of the Korean Treasury Bond Futures Using the Term Structure of Interest Rates

This paper shows the limitation of the cost-of-carry model which is used for pricing the theoretical value of the KTB futures, and proposes an alternative pricing model based on the term structure of interest rates. Under the assumption of 1-factor term structure, this paper treats the theoretical price of KTB futures price as a risk-neutral expectation of payoff function at maturity and derives the approximated formula for pricing the KTB futures. As compared with our price of KTB futures using the term structure of interest rates, the conventional KOFEX price based on the cost-of-carry model tends to be overvalued as the time to maturity increases. This result is due to the difference between the futures and forward prices which is caused by treating the futures contract as the forward contract in the conventional KOFEX pricing model. In particular, this discrepancy becomes more significant when the price of underlying asset and the interest rates are negatively correlated and the time to maturity is longer. The bond futures contract is a typical example of financial instrument whose price has a negative correlation with interest rates