As a financial economist, I seek to understand the characteristics of financial intermediations in the context of the new normal. This theme deals with the questions such as what determines the motivations of the financial market participants and how their actions affect market outcomes and in turn how market outcomes also change their actions both in the local and global financial system. I believe the empirical research should start with the real economic problems we face and have policy implications thus my research is always trying to get ideas from close observations of reality.
1. Financial Intermediation in the local territory
The first line of my research interests summarizes into the phrase “know your player” in the context of financial intermediation at the country level. More specifically, my paper titled “The Size of the Subprime Shock” show that the loss of AAA-rated subprime MBS is less than 0.2%. This implies that the main cause of the recent global financial crises is the characteristic change of financial intermediation process of the global banks. Another paper with Gary Gorton titled “Staying in the Pack: Banks and LIBOR during the Crisis” investigates the LIBOR (London Interbank Offered Rate) market during the recent financial crisis and show that banks acted to suppress bank-specific information. In other words, to reveal information is not always efficient in the financial market. In addition, a paper with Bae and Kim titled “What Do Equity Hedge Funds Really Do? Evidence from the QE Period” examines the underperformance of the hedge fund industry when the Federal Reserve made use of Quantitative Easing. Our results show that the alpha of equity hedge funds has almost disappeared, and the risk exposures of both directional and non-directional funds changed substantially during the QE period.
I also conduct the research in the same manner particularly focused on the Korean financial market. A paper with Choi titled “Are Political Events Systematically Priced in the Stock Market?” examines how the political events represented by government regime changes affect the equity market as a systematic risk factor in Korea. We empirically develop our new risk factor, political event factor, to capture the political event risk in the equity market and find the risk from the government regime changes are systematically priced for the equity market. My paper with Jeong titled “The More Connected, the Better?” is based on the Korean financial sector from 1990 to July 2015. We show that increasing connectivity among financial companies can worsen the price-discovery process in the equity market.
2. Financial Intermediation in the Global Financial System
The second stream of my research interests lays in the cross-border capital flow in the global financial system. In a paper with Hwang and Jeong titled “Which Net Capital Flows Matter?”, we develop a new classification of extreme net capital flows in terms of 1) whether net capital flows rise or fall, and 2) whether the episode is driven by asset flows or liability flows. And then we investigate which capital flows affect real economy and are related to the banking crisis. Additionally, my paper with Hwang and Park titled “Are Capital Flow Measures Successful on Mitigating Capital Flow Episodes?”, we construct the novel micro-level dataset containing capital flow policies for 21 countries and show that which policies are effective to capital flow volatility. Furthermore, in a paper with Choi and Hwang titled “Captivation of Regulatory Arbitrage”, we examine asset-backed commercial paper (ABCP), which played a central role in the global financial crisis and showed cross-border capital flow. We construct a new hand collected dataset containing the detailed information on the Euro-issued ABCP and examine how the motivation of ABCP issuer changed over time. Our work is expected to help regulators and policy makers understand the full implication of introducing new policies to mitigate the capital flow.
3. Korean housing market and household debt problems
Another research interest is the analysis of the housing market in Korea. A paper with Park and Moon titled “Does News affect the Housing Market?” investigates the impacts of sentiment and consumer expectations in Seoul's housing market dynamics. Korea's housing market has a unique triplet structure, made up of sale, Jeonse and monthly rent. We construct the comprehensive new dataset containing all housing transaction data in Seoul and text-mining data from new articles from January 2009 to December 2013 and show that sentiment from the news article actually affects the housing price change. This paper firstly introduced the text mining technique into this literature. Also as a research fellow of Bank of Korea, Daejeon&Chungnam Division, in “The Ripple effect of Sejong city on the housing price of Daejeon area”, I and my co-authors find that the introdution of Sejeong-city actually decreased the housing price of near city areas by using micro-level housing transaction data.
4. Concluding remarks
Going forward, a primary research objective will be to explore in greater depth the central questions of how financial intermediation behaviors evolve in the new normal paradigm and how these behaviors affect the global economy. In working progress, the work with Min titled “The evolution of ELS market in Korea”, we investigate why security firms issued a substantial amount of ELS (Equity-Linked Securities) and how this derivative market affects the underlying asset market. And the work with Lei Xie titled “Ten Stylized Facts about the Securitization Market”, we collect all universe of securitization products in the U.S. and plan to study why the securitization market has exploded during the past thirty years.
As a financial economist, my work emphasizes a tight connection with policy issues. Understanding financial intermediation behaviors will help us identify the systemic risk in the financial market, and drive better evaluation and policy.