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Boxed KOSPI

  • Myeong Hyeon Kim Department of Business Administration, Seoul National University of Science and Technology, Seoul, South Korea
  • Young Min Kim School of Statistics, University of International Business and Economics, Beijing, China.
  • Kisung Yang School of Finance, Soongsil University, Seoul, South Korea
Korea Composite Stock Price Index (KOSPI) has been becalmed for ve years before 2017 due to its narrow movement, being continuously cited as \BOXPI" meanong boxed KOSPI. We endeavor to resolve the BOXPI phenomenon by as- sociating heterogeneities in sensitivity of sector portfolio indices to their devia- tions from the market index with fundamental valuations at the industry level and macroeconomic determinants at the aggregate level. To do so, we derive the theoretical stochastic dynamics of the sector indices capturing sector rotation strategies. Then we estimate the dynamic mean-reversion speed of sector portfolio indices to KOSPI. Finally, we investigate three possible hypotheses from the valu- ation, economic fundamental, and economic policy uncertainty perspectives. Our main nding is that nancial ratios, several macroeconomic properties of a small open economy and uncertainty proxies are proven to be the main determinants to explain the BOXPI. To be specic, the sector rotations turn out to be more sen- sitive to the market variables during the BOXPI period and comove tightly with the economic variables during the non-Boxed period. Our ndings have important implications for market practitioners.

  • Myeong Hyeon Kim
  • Young Min Kim
  • Kisung Yang
Korea Composite Stock Price Index (KOSPI) has been becalmed for ve years before 2017 due to its narrow movement, being continuously cited as \BOXPI" meanong boxed KOSPI. We endeavor to resolve the BOXPI phenomenon by as- sociating heterogeneities in sensitivity of sector portfolio indices to their devia- tions from the market index with fundamental valuations at the industry level and macroeconomic determinants at the aggregate level. To do so, we derive the theoretical stochastic dynamics of the sector indices capturing sector rotation strategies. Then we estimate the dynamic mean-reversion speed of sector portfolio indices to KOSPI. Finally, we investigate three possible hypotheses from the valu- ation, economic fundamental, and economic policy uncertainty perspectives. Our main nding is that nancial ratios, several macroeconomic properties of a small open economy and uncertainty proxies are proven to be the main determinants to explain the BOXPI. To be specic, the sector rotations turn out to be more sen- sitive to the market variables during the BOXPI period and comove tightly with the economic variables during the non-Boxed period. Our ndings have important implications for market practitioners.
Korean Stock Market; Cyclical vs. Defensive; Sector Rotation