Research

Working Papers

"Measuring Monetary Policy Surprises with Text Mining: The Case of South Korea,"

joint with Young Joon Lee (Yonsei University) and Soohyon Kim (Bank of Korea)

We propose a novel approach to measure monetary policy shocks using sentiment analysis, which is relatively free from specification errors compared to VAR-identified shocks and allows time for a wider circle of market participants to digest information compared to shocks identified through intraday Fed futures data. We quantify the tones of news articles around 152 dates of Monetary Policy Board (MPB) meetings of the Bank of Korea (BOK) from 2005 to 2017 and then measure monetary policy surprises using the changes of those tones following monetary policy announcements. We estimate its impact on asset prices and find that it better explains changes in long-term rates, while changes in the Bank of Korea’s base rate and VAR-identified monetary shocks are more closely associated with changes in short-term rates. Our result strongly suggests that a text mining approach to measure monetary policy surprises can be a useful complement to extract market expectations on future monetary policy.

"기후변화 이행 리스크를 고려한 스트레스 테스트" [presentation file] (because of the NiGEM license and the sensitivity of final outputs, some figures and numbers are not made public)

("Climate Stress Test: The Case of South Korea")

joint with Soh Young In (Stanford University) and Jae Yoon Kim (Bank of Korea)

"Is "Being Green" Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns"

joint with Soh Young In (Stanford University) and Ashby Monk (Stanford University)

Stanford Global Projects Center (GPC) Working Paper

Investors are increasingly prioritizing climate finance and looking for investment opportunities of “yield with impact.” In this regard, this study empirically examines the relationship between firm-level carbon intensity, company characteristics, and stock returns by analyzing 75,638 observations of U.S. firms from January 2005 to December 2015. Different from previous studies, we measure firm-level carbon intensity using the actual amounts of greenhouse gas (GHG) emissions available from Trucost database, and construct EMI (“[carbon] efficient-minus-inefficient”) portfolio based on firm-level carbon intensity. We find that carbon-efficient firms tend to be firms with lower book-to-market ratio, higher ROA (return on assets), higher Tobin’s q, higher free cash flows and cash holdings, higher coverage ratio, lower leverage ratio, and higher dividend payout ratio. Most surprisingly, we find that EMI portfolio exhibits a large positive cumulative return after 2009, suggesting that carbon-efficient firms outperform carbon-inefficient firms in stock market. In addition, we find that this extra return is not priced by well-known risk factors of size, value, momentum, operating profitability, and investment. Estimating factor loadings on industry portfolios, we also find that EMI portfolio has explanatory power that is independent from well-known risk factors. We discuss our finding’s implication for climate finance.

"New Evidence on Procyclical Bank Capital Regulation: The Role of Bank Loan Commitments,"

Previous research on procyclical bank capital regulation has largely focused on the role of increased loan charge-offs and deteriorated credit ratings in economic downturns. We present another independent source of procyclicality working through bank loan commitments. We find that, as firms draw down more from their pre-existing credit lines when credit market conditions are tight, this increased takedown raises bank assets via involuntary lending and thus lowers the capital adequacy ratios of commercial banks, making them more procyclical. This effect is found to be quantitatively important and needs to be addressed in designing the regulatory framework for reducing procyclicality.

"Agency Costs and Corporate Liquidity Demand: Evidence from Bank Loan Commitment Usage during the Financial Crisis,"

Using a large contract-level, high frequency database of bank loan commitments from June 2007 to May 2009, we provide a more complete picture of firms' takedown behavior. We find that firms' behavior regarding credit lines is very different depending on the firms' creditworthiness. Takedown by riskier or low-quality firms increases with a widening credit spread, but not with increasing market interest rates. Meanwhile, takedown by high-quality firms increases with declining market interest rates and is not much affected by a widening credit spread. We discuss this finding's implications for the bank lending channel and procyclical bank regulatory capital.

Work in Progress

Home ownership and wealth accumulation: evidence from South Korea
Validity of environmental performance metrics, joint with Soh Young In (Stanford University) and Ashby Monk (Stanford University)
Decarbonization, Stock Returns, and Firm Characteristics: Evidence from Global Markets, joint with Soh Young In (Stanford University) and Ashby Monk (Stanford University)
Identifying bank-lending channel and the role of loan commitments
Explaining bond trading patterns in Korea: risk aversion versus informational asymmetry
Explaining the anomaly of preferred stocks
Evaluating central bank communication using text mining

Books

Translation of House of Debt: How They (and You) Caused the Great Recession, How We Can Prevent It from Happening Again, by Atif Mian and Amir Sufi, October 2014, OpenBooks. [Kyobobooks link] [Ridibooks link]

Translation of Radical Markets: Uprooting Capitalism and Democracy for a Just Society, by Eric Posner and Glen Weyl, September 2019, Bookie, [Kyobobooks link] [Ridibooks link]

Publications

[in English]

"Measuring the Natural Rate of Interest with Financial Gaps: The Case of Japan and South Korea,"

joint with Dong Jin Lee (Sangmyung University), Joon-Ho Hahm (Yonsei University), and Hail Park (Kyung Hee University)

Japan and the World Economy, June 2020

We estimate "finance-adjusted" trend growth and natural rates of Japan and South Korea by extending a semi-structural model of Laubach and Williams (2003). Consistent with international evidence of the advanced economies, both trend growth and natural rates of interest of Japan and South Korea have been declining over the past, suggesting the important role of global factors. However, the declining patterns of Japan and South Korea are far steeper during the past 25 years. When considering domestic and global financial factors, trend growth and natural rate of South Korea are more affected by foreign financial factor while the role of domestic financial factor is more pronounced for Japanese economy.

"Deciphering Monetary Policy Committee Minutes with Text Mining: The Case of South Korea"

joint with Youngjoon Lee (Yonsei Unversity) and Soohyon Kim (Bank of Korea)

Korean Economic Review, July 2019

We quantify the Monetary Policy Board (MPB) minutes of the Bank of Korea (BOK) using text mining. We propose a novel approach using a field-specific Korean dictionary and contiguous sequences of words (n-grams) to better capture the subtlety of central bank communications. We find that our text-based indicator helps explain the current and future BOK monetary policy decisions when considering an augmented Taylor rule, suggesting that they contain additional information beyond the currently available macroeconomic variables. In terms of explaining the current and future monetary policy decisions, our indicator remarkably outperforms English-based textual classifications, a media-based measure of economic policy uncertainty, and a data-based measure of macroeconomic uncertainty. Our empirical results also emphasize the importance of using a field-specific dictionary and the original Korean text.

"Detecting Currency Manipulation: An Application of State-Space Model with Markov Switching"

joint with Soohyun Kim (Bank of Korea)

Japan and the World Economy, March 2019

We propose a state-space model with Markov switching as an auxiliary tool for detecting currency manipulation. Without imposing any a priori restrictions, our model tests if fluctuations of a country's exchange rate are symmetric and if there exists a time-varying support level or resistance level of exchange rate. Using the monthly data of countries on the "monitoring list" of U.S. Treasury as of April 2017, we find that exchange rates of China, South Korea, Switzerland, and Taiwan rarely fall below its trend, but are plucked upward from time to time by transitory shocks, suggesting a possibility that the foreign exchange authorities of these countries may have been intervening more actively against appreciation shocks. Meanwhile, Japan's exchange rate fluctuates symmetrically. We associate changes in foreign reserves (as a proxy for currency intervention) with the estimated trend and transitory components and further discuss our empirical findings in terms of asymmetric intervention.

"Unintended Consequences of Well-Intentioned Policies of South Korea: Lessons for Emerging Economies on Capital Market Liberalization"

Global Economic Review, January 2019

While South Korea has achieved remarkable economic and democratic transformation during the past decades, it has suffered from two major economic crises, both of which are essentially liquidity crises. In this regard, the purpose of this study is twofold: one is to review the debates on capital market liberalization and highlight the dark sides of South Korea’s experience. The other is to explain why South Korea has experienced another crisis in 2008 even though it already experienced the same liquidity crisis in 1997. We highlight the unintended consequences of policies with their own legitimate purposes and provide lessons on capital market liberalization for emerging economies.

"Can Investors Profit from Security Analyst Recommendations?: New Evidence on the Value of Consensus Recommendations"

joint with Sung Jun Park (Yonsei Unversity)

Finance Research Letters, forthcoming

This paper revisits the question of whether investors can benefit from consensus recommendations of stock market analysts in US equity markets. To examine the profitability net of transactions cost, we calculate transactions cost based on effective tick spread. We find that transactions cost becomes noticeably lower from 2001 and the strategy of purchasing 'strong buy' stocks and shorting 'strong sell' stocks yields the abnormal returns of 4.7-5.8% per year during the period of 2001-2016, even after accounting for transactions cost. We also find that 'strong buy (sell)' stocks are growth (value) firms and short-term winners (losers). We discuss our empirical results in the context of market efficiency.

"Allocation of Time and Consumption-Equivalent Welfare: A Case of South Korea,"

joint with Soohyun Kim (Bank of Korea)

Global Economic Review, July 2018

Using "2014 Time Usage and Quality of Life" of 17th KLIPS (Korean Labor and Income Panel Study), the first and most detailed time use survey of its kind in South Korea, we first document the patterns of time use in market work, nonmarket work (household work), child care, and a variety of definitions in leisure. We find that, while men work longer hours, men's additional market work is well compensated by more leisure and less hours in nonmarket work and child care. We also find within-household unequal distribution of time use in nonmarket work, child care, and leisure in favor of men. Consistent with the cases of US and other advanced economies, high-income earners tend to enjoy less hours of leisure while they spend more money in leisure activities. As an illustrative purpose to see the determinants of household-level welfare, we calculate the consumption-equivalent measure that considers both consumption, leisure, life expectancy, and uncertainty. Our result suggests that household-level welfare measures based solely on income or consumption are both incomplete and misleading.

"Dispersion of Household Debt and Its Macroeconomic Implications: Evidence from South Korea,"

Joint with Soohyon Kim (Bank of Korea)

lead article, Bank of Korea Economic Analysis, March 2018.

This study establishes the stylized facts on economic inequality using KLIPS (Korean Labor & Income Panel Study) of 2001-2015 and presents empirical evidence on their macroeconomic implications. Firstly, we find that income and consumption inequality have not increased in 2000s, contradicting public belief. However, debt inequality has increased steadily in 2000s as high-income group leads a run-up of household debt while low-income group faces more limited access to financial markets. Secondly, in addition to increased debt inequality, usages of debt are very different depending on income levels. Using fixed effects panel regressions and panel VARs, we find that high-income group tends to borrow in order to invest in real estate assets or buy houses, while low-income group borrows to consume. We discuss possible links between inequality of debt, income, and wealth based on our findings.

"Wealthy Hand-to-Mouth Households in South Korea"

Global Economic Review, June 2017.

This study establishes the stylized facts on household balance sheets in South Korea and empirically investigates their macroeconomic implications based on the concept of 'wealthy hand-to-mouth (HtM)' households that hold little liquid wealth with owning large amount of illiquid assets. Using a household-level panel data for the period of 2000-2014, we find that (1) there are neither deleveraging of household debts nor a sharp decline in house price even during the financial crisis, (2) run-up in household debt in 2000s is led by high-income group, (3) regardless of net worth level, wealth is highly concentrated on illiquid assets such as housing and real estate, (4) the share of "wealthy hand-to-mouth" households is very high compared to the cases of other advanced countries. We estimate the marginal propensity to consume out of a transitory shock and find that the consumption response of wealthy hand-to-mouth households is larger compared to the non-credit-constrained group, posing a threat to macroeconomic stability. Using discrete choice models with fixed effects, we also find that a household that acquire more real estate assets is more likely to become wealthy HtM when its income is relatively lower or its indebtedness is relatively higher. We discuss the characteristics of wealthy hand-to-mouth households and the role of macroprudential policy.

"Spillover Effects of US Unconventional Monetary Policy on Korean Bond Markets: Evidence from High-Frequency Data" [online appendix]

joint with Ji Yong Um

Development Economies, March 2016.

We empirically investigate the effects of US unconventional monetary policy on Korean bond markets using a high-frequency event-study approach.We find that (1) not every UMP-related news affects the domestic bond yields on daily (2) UMP news affects only short-term foreign bond investment with high-frequency arbitrage opportunities, (3) factor analysis suggests that net foreign investment is affected more by expectation on future US short-term policy rates compared to long-term risk premia in US Treasury market, (4) CDS premium for South Korea, proxy of local risk factor, also affect net foreign bond investment. Based on our empirical findings, we conclude that, while push factors do not dominate pull factors, Korean bond market is not a “safe haven” from the normalization of US monetary policy and the supervisory authority should take a close look at the share and composition of foreign bond investment.

"Short-Term External Debt and Foreign Exchange Rate Volatility: Evidence from the Korean Market"

joint with Taeyoon Sung and Danbee Park

Emerging Markets Finance and Trade, 2015.

We empirically analyze the main determinants of foreign exchange rate (FX) volatility in emerging market economies using the data of Korea corporations and financial institutions. We find that short-term external debt is more important than trading volume of foreign investors in explaining FX volatility. Our results suggest that short-term debt controlling measures, such as a tax levy on short-term borrowing, can be more effective in moderating FX volatility than can the measures affecting the trading volume, such as a Tobin tax.

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"Interstate Banking Deregulation and Bank Loan Commitments"

The B.E. Journal of Macroeconomics (Advances Tiers), Vol 12: Issue 2, March 2012.

This paper uses the staggering timing of branching and interstate banking deregulation as a natural experiment to explore the effect of agency cost on the use of bank loan commitments. A simple inventory-based model shows that lower agency cost allows a bank to issue more loan commitments because lower agency cost alleviates the difficulty of liquidity management associated with loan commitments. Our empirical analysis confirms the model's testable implication: Commercial banks issue more loan commitments after interstate banking deregulation, which lowers agency costs through expanded internal capital markets across states. However, the effect of branching deregulation is weak or non-existent. Considering the role of bank loan commitments, this result not only shows how banking deregulation affects bank balance sheets but also suggests one route through which interstate banking affects the real economy.

"Does Fiscal Policy Help Those Who Need It Most?: Evidence from the U.S. and the Eurozone"

joint with Jong-Hee Kim and Taeyoon Sung

Global Economic Review, Volume 41, February 2012.

With a notion that the eurozone does not have a fiscal federalist system, we analyze the effectiveness of fiscal policy at the country level of the eurozone and the state level of the U.S. Our empirical analysis shows that, not like the case of the U.S., the role of fiscal policy for counteracting regional income shocks is far weaker in low-income countries in the eurozone. In addition, the contagion effect of fiscal crises in the eurozone is stronger and this effect becomes stronger in the eurozone after the establishment of the European Union. Our finding provides empirical evidence for fiscal problems in a single-currency area without a fiscal federalist system.

"Asymmetric Exchange Rates and Unofficial Exchange Rate Interventions: The Case of South Korea"

International Economic Journal, Volume 25, September 2011.

Applying Milton Friedman's `plucking' model of output fluctuations, we investigate the behavior of the Korean won/dollar exchange rate using a state-space model with Markov switching, which incorporates both symmetric and asymmetric shocks. We find that the Korean won/U.S. dollar exchange rate rarely falls below its trend, but is plucked upward from time to time by transitory shocks. This asymmetry suggests that the monetary authority unofficially intervenes in foreign exchange market to support its own target level from below. Further evidence from changes in reserve assets indirectly supports our finding.

"Genes and Social Mobility: A Case for Progressive Income Tax"

Global Economic Review, December 2009.

The effect of ability inheritance on income distribution and social mobility is analyzed with an emphasis on the role of progressive income tax. Epstein-Zin style utility function is used to highlight the role of risk aversion. The result shows that higher genetic inheritability leads to lower per capita income, higher income variance and lower aggregate welfare at the steady state. This tendency is intensified when the elasticity of a child’s income to parent’s educational investment is higher. In this setup, it is shown that progressive income tax can be a welfare-enhancing tool by increasing social mobility. The optimal progressive income tax rate is obtained in the benchmark model and its positive effect is discussed in the context of "veil of ignorance," a concept proposed by Rawls.

"Explaining the Equity Premium in Korea"

Journal of the Korean Economy, joint with Kwanghwan Kim, August 2009.

Since the equity premium in Korea is not larger than 3% annually, far smaller compared to the case of U.S., around 6%, the equity premium puzzle has been considered not to be severe. With GMM, Hansen-Jagannathan bounds, and long-run risk approach, our analysis strongly suggests that the equity premium puzzle exists in Korea. We find that low consumption growth volatility, together with low correlation between consumption growth and asset returns, contribute to its existence.

[In Korean]

"기후변화의 경제학"

("The Economics of Climate Change")

joint with Soh Young In (Stanford University)

The Korean Journal of Economics, June 2021.

"경제분석을 위한 텍스트 마이닝"

("Text Mining for Economic Analysis")

joint with Soohyun Kim, Youngjoon Lee, and Jhinyoung Shin

Panel for Korean Economic Analysis, April 2020.

"머신러닝을 이용한 경제분석". [slides]

("A Short Guide to Machine Learning for Economists")

joint with Jeong Won Ko