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

Abstract

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

Economic policy uncertainty and volatility of treasury futures

“…Further, Orlowski (2015) found that electronic trading mechanism significantly reduced the price volatility of US Treasury futures. Park et al (2017) analyzed the impact of foreign investors' participation on the price volatility of Korean Treasury futures. Therefore, the price volatility of Treasury futures is affected by the economic policy and trading mechanism among other factors.…”

Price discovery in commodity derivatives: Speculation or hedging?

“…Several studies examine price discovery in commodity futures markets with mixed findings. Garbade and Silber (1983) report that wheat, corn, and orange juice futures lead spot markets. Hauptfleish et al (2016) reach a similar conclusion in gold futures markets.…”