Intermediary asset pricing in the Korean financial market

Abstract

The Korean IMF crisis has served as a catalyst for the Korean financial sector restructuring 20 years ago, creating modernized financial institutions with sophisticated trading capabilities. This paper discusses the extent to which the marginal value of wealth of these intermediaries is reflected in the Korean financial asset prices based on intermediary asset pricing theory. This study confirms the cyclicality of the two models is indeed the case in Korea as well, but both models show low explanatory power in cross-sectional asset pricing tests. Further analysis shows that isolating the ‘true’ marginal investors with exposure across asset classes creates an improved measure of the intermediary marginal value of wealth, and the factor is priced more significantly in stocks with greater exposure to intermediary ownership. Lastly, this paper confirms the significance of the United States financial intermediaries in pricing Korean financial assets through the scope of intermediary asset pricing model.