A Risk-Return Puzzle in the Korean ELW Market

Kim, Do Wan; Kim, Bae Ho

Korean Journal of Financial Studies 2016;45(1):61-87.
Published online February 28, 2016.

Do Wan Kim, Bae Ho Kim

ELW 시장에서 요구되는 위험프리미엄이란?

김도완, 김배호

Abstract

Although financial investors require positive premium for taking the counterparty’s credit risk in general, the opposite phenomenon appears in the Korean Equity Linked Warrant (ELW) market. Using daily ELW trade data from 2008 to 2014, we find that this seemingly counterintuitive trend originates from the role of liquidity providers (LP). Specifically, ELW-issuing firms with lower credit quality tend to make an extra effort to improve the liquidity of their securities through aggressive LP activities. Our empirical results indicate that the liquidity preference in the Korean ELW market generally dominates the required compensation for credit risk of the ELW issuers. This finding is more pronounced for more liquid securities near the at-the-money strikes accompanied by high trading volume.

Key Words: 유동성 공급자,위험프리미엄,신용위험,Credit Risk,ELW,Equity Linked Warrant,Liquidity Provider,Liquidity Risk,LP,Risk Premium,유동성위험