Asia-Pacific Journal of Business (아태비즈니스연구)

KNU The Institute of Management & Economy Research (강원대학교 경영경제연구소)
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Market Risk Premium in Korea: Analysis and Policy Implications

한국의 시장위험 프리미엄: 분석과 시사점

  • Se-hoon Kwon (Division of Business Administration, Sangmyung University) ;
  • Sang-Buhm Hahn (Division of Economics, Kyonggi University)
  • 권세훈 (상명대학교 경영학부) ;
  • 한상범 (경기대학교 경제학부)
  • Received : 2024.05.30
  • Accepted : 2024.06.27
  • Published : 2024.06.30
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Abstract

Purpose - This study provides an overview of existing research and practices related to market risk premiums(MRP), and empirically estimates the MRP in Korea, particularly using the related option prices. We also seek to improve the current MRP practices and explore alternative solutions. Design/methodology/approach - We present the option price-based MRP estimation method, as proposed by Martin (2017), and implement it within the context of the Korean stock market. We then juxtapose these results with those derived from other methods, and compare the characteristics with those of the United States. Findings - We found that the lower limit of the MRP in the Korean stock market shows a much lower value compared to the US. There seems to be the possibility of a market crash, exchange rate volatility, or a lack of option trading data. We investigated the predictive power of the estimated values and discovered that the weighted average of the results of various methodologies using the Principal Component Analysis (PCA) is superior to the individual method's results. Research implications or Originality - It is required to explore various methods of estimating MRP that are suitable for the Korean stock market. In order to improve the estimation methodology based on option prices, it is necessary to develop the methods using the higher-order(third order or above) moments, or consider additional risk factors such as the possibility of a crash.

Keywords

Acknowledgement

We would like to extend our gratitude to everyone who provided valuable comments at the Korean Securities Association's Fall Workshop in Sokcho on October 23, 2023, and at the Capital Market Forum on November 10, and to FN-GUIDE for their financial support and provision of data for the research. This work was supported by Kyonggi University Research Grant 2021.

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